Podcast Transcripts

Jim Glennon (00:00) Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Welcome everybody. Welcome. It is a new week. We've got a great show for you today. And as always, in the interest of making sure you know what to watch, whether you're an originator or a capital markets person. or just someone interested in mortgage industry some great market commentary. Keep listening in. Today, we're gonna do market update as always. We had some unemployment data last week. We've got some inflation data coming up this week. We'll also talk a little bit about what's going on or not going on with the war in Iran. After that, we will bring back an oldie, but a great one. We'll have James and Vimi on to talk MSR, so mortgage servicing rights. So we'll talk a little bit of MSR 101 and how that feeds into things like loan pricing and refinance, recapture, all kind of simplify the area around the MSR market. Before we get to that, just in the way of data, the OB-MMI, the conventional 30 year, that sits currently at 6.3%. So still pretty elevated, higher than we'd like to see it, but as long as we've got this war happening and we know real path or off ramp to resolution, I think we're going to continue to see rates above that 6%. And then the 10 years at 4.4, so still relatively thin on the spread between those two, less than 2 % is what we like to see, we're about 1.9. So we'll keep an eye on that. All right, let's check in with James and Alex and get our market update. Jim Glennon (02:06) Okay, welcome gentlemen. James, Alex, how's it going? Alex Hebner (02:11) Morning Jim, doing well, how are you? Jim Glennon (02:14) We have a new week. But first, before we get into this week, what happened last week? We had the big numbers. We had unemployment and a little bit, maybe a little bit of activity in the war in Iran, although it's starting to feel like Groundhog Day. Let's start with numbers. What did we see for non-farm? What's the unemployment picture look like? Alex Hebner (02:35) Definitely, non-farmers definitely the biggest number of last week. was strongly to the upside. was plus versus an estimate of about 55,000. So kind of blew the number out of the water. Don't like to get too over our skis on these numbers just because it is the end of the day just to drop in the bucket. But looking through it, the unemployment rate didn't change at all. It's still sitting at 4.3%. I like to see that it wasn't just all healthcare jobs this time around. It was only a third or so healthcare jobs that came in about 37,000 and then transporting and warehousing, which is usually the second runner up that are construction jobs. They kind of trade places for second place. one came in second place. So it was a little bit more of a balanced jobs report. But aside from that, think the most outstanding part about it was that it did... Jim Glennon (03:05) Right. Alex Hebner (03:28) was far better than the estimates we're expecting. Jim Glennon (03:31) Right. Yeah. We keep plugging along low unemployment rate, making a decent amount of jobs every month, other than a, you know, a small negative number a few months back, we're still kicking. it's, you know, it puts the fed in kind of an interesting or kind of a boring spot where they, you know, unlikely to cut rates because of what's going on with unemployment and inflation. But unlikely to hike rates either, because things are kind of, I don't know, still feel a little bit fragile on the surface, under the surface. What did we get in terms of Iran? we any notable changes there? I feel like every week it's just another negotiation or another negotiation that's terminated or thrown out the window. Alex Hebner (04:05) Absolutely. Yep. Yeah. Very much so the same this I think all of last week was kind of hyping up the expectation that Iran was going to respond to the U.S.'s initial plan. Their response was clearly not enough. Trump shot it down on true social pretty quickly, saying it was unacceptable what they were asking for. So we're kind of back to square one. There's no active at least between the U.S. and Iran. There's still proxy conflicts going on. Jim Glennon (04:41) Mm-hmm. Alex Hebner (04:44) the odd drone goes up every now and then, but that doesn't seem to shake the foundation of the ceasefire itself until like an all out shooting war like we saw back in March. But it does feel like on the diplomacy front, we're back to square one at the moment. I do wanna note, Trump is traveling to China. He's having a meeting with Xi Jinping. Iran is typically, they're not a communist country by any stretch of the imagination, but they are Chinese aligned. So maybe they can hammer something out. between Trump and Xi in Beijing. I think that's kind of what people are waiting for at this point. again, we're back to square one in regards to the Pakistani intermediate talks between Iran and the US. Jim Glennon (05:24) Yeah, nothing, no big changes there. still have expensive oil, expensive gas. think, yeah, the average 450, that's about what we're paying here in Colorado. I was just in California. They're going to have to add an extra digit to some of those boards out in front of the gas stations. They're getting upwards of, you know, close to $7 a gallon in Southern California. Alex Hebner (05:39) Ha ha. Yeah, no, it definitely feels like a who blinks first kind of scenario. Both sides seem to think that they have, they have the cards, you know, the, U S is kind of banking on, I still think they're kind of banking on maybe some sort of regime change or a softening in the IRGC's positioning while at the same time, Iran's kind of banking on it's an election year. ⁓ you know, Trump doesn't, he's being blamed for higher gas prices and, and, ⁓ polls are showing that this conflict itself is relatively unpopular. So, Jim Glennon (05:53) Mm-hmm. Alex Hebner (06:13) Yeah, it will have to see, only time will tell. Jim Glennon (06:17) Right. And meanwhile, there's a couple other wars going on. keep having to remind myself of that. was reading again about the Ukraine, Russia war and the amount of people that have been killed in that conflict and just the undertone or the thought there ⁓ might be regime change in Russia here in the not too distant future. think the people of that country are feeling like Putin maybe has overstayed his welcome in power. And I think a millionish soldiers have died in that war, which is just kind of bananas considering they were the invading party in that scuffle. anyway, still a lot going on in the world. like you said, only time will tell. Alex Hebner (07:03) Absolutely, absolutely. If it's anything like ⁓ the closure of the Syrian civil war, it could be really fast after quite a long period of stagnation. So we'll have to see. Jim Glennon (07:14) Right. All right. What's going on this week? We get some numbers. We get to see the rest of the picture, which would be inflation, the second half of the coin for the Fed kind of expecting higher numbers because we're getting probably now the full impact of the war in Iran and fuel prices, which, you know, raising all prices across the board. James Cahill (07:36) We are coming back to inflation this week after jobs at the end of last week. We'll see on Tuesday, we'll see CPI. The expected value right now is going to be up 0.6%, which puts us at a total year of a year of just the generalized number. It's 2.7 % core, which strips out the most volatile piece right now being food and of course, energy in the form of gasoline. As you said, California is looking at some pretty high gas prices. As this war continues, may see this continue to see that spread between core and the actual number kind of continue to widen. expect all goods, all services to slowly be pushed up over time. But if gasoline keeps on its kind of precipitous rise, that spread will continue. Wednesday. we'll come around to PPI. So we'll get to see where the inflation is hitting producers. The increase of 0.6 % is the same, overall PPI sits around 4 % and it's 3.6 % core. So it's much higher on the producer side, which makes sense. You know, over the past two years now, or a year and half, we've been talking about. the tariffs and who's been eating them. If the producer side of this has been taking a lot of the blow, inflation has been creeping up more than it on the consumers. And now this is continuing to push them further up. Jim Glennon (09:05) Right. So we'll continue to see, I guess with fuel as well, if producers are eating some of that cost or if they're just adding it onto what they're charging the consumer. All right. What else are we seeing here? So we've got, we covered the meeting between Trump and China. Covered everything on inflation. Yeah. We're not, not seeing a ton right now, but I guess next week we will all be in New York city. So hopefully we'll see some of y'all there. We'll have some other discussion. We'll, we'll record another podcast leading up to that. And we'll have some next week's numbers for you as well. All right, what else, gentlemen? Alex Hebner (09:49) think that just about covers it. I'm looking forward to ⁓ seeing some folks' faces in New York. Jim Glennon (09:54) Yeah, same. All right. Quick and easy this week. Thanks a lot for the info. Alex, James, appreciate you. James Cahill (09:57) And that's. James Cahill (10:01) Hey, good afternoon, everyone. My name is James Cahill. I'm joined by Vimi Vasudeva of the MSR team. She's actually my boss. going to be talking MSR 101. We're going to be doing a two-parter here. First part is just an introduction to MSR. What are these assets? How should we think about them? The second part will be does the MSR team do day to day, as well as how should we think about hedging these types of assets. start, if you price out loans or you're hedging or you think about profitability, you're actually probably dealing with MSRs, whether or not you really realize it. Vimi Vasudeva (10:38) Yeah, and James, that is my favorite part because people will often say, I don't really use it with MSR. I don't really need to understand this asset very well. And that's when I say, definitely do. You just don't call it that. James Cahill (10:55) Yeah, I've heard it said it's like taxes, right? ⁓ You might not like them, but they're definitely there and you should know about it. Vimi Vasudeva (11:02) Yeah, that's a great analogy. But MSRs, they do show up in an originator's rate sheet. They show up in pipeline marks, which is best execution. They show up in retain versus release decisions. So even if you're not on the servicing side, the MSR is actually quietly influencing a lot of your decisions. James Cahill (11:24) into our first question here, I've been laughing at this all morning because of course am on the MSR team underneath Vimi. So hopefully I could have been able to answer these, but Vimi, what is an MSR? Vimi Vasudeva (11:37) James, that's so funny because I was thinking about that. was like, hmm, should we have reversed roles here so I can test James's knowledge? But I certainly don't need to. I know that you know all the yes, let me explain what an MSR is. And I should probably start by actually defining the acronym. I think everyone knows the mortgage industry loves a good acronym, but the MSR stands for the mortgage servicing right. What this really is, it's a right to collect. cash flows over time from servicing a mortgage. So this might be servicing a mortgage that an originator has originated or that an investor has bought. Either way, the owner of the MSR collects a servicing fee, a base fee that they're compensated for for servicing the loan. And since the servicer has to collect monthly payments, and as part of this duty is to remit the principal and interest part of the payment to the ultimate investor, ⁓ also having to manage the taxes and insurance part of the payment, the servicer will deduct a fee from the borrower payment before remitting the payment to the investor. James Cahill (12:48) So what is the typical servicing fee and how does that translate into dollars? Vimi Vasudeva (12:55) Yeah, so I would say the typical servicing fee is going to be anywhere between 25 and 50 basis points for a fixed rate conventional loan. That's generally going to be 25 basis points. And what this means is you can think of it as a percentage, right? 25 basis points means a quarter percent of the remaining mortgage balance, also known as the unpaid principal balance, UPB, another one 12th of which is paid per month. So To put this into a numeric example, let's think about a mortgage with a UPB of 100,000. The servicing fee is 25 basis points. And so this means that the servicer is entitled to retain the quarter percent, the 25 basis points divided by 12, times 100,000 UPB, which translates into roughly $21. And so what this means is that before passing on a borrower's payment to the final note holder, servicer gets to keep that 21 ish dollars, then that's what they're compensated for. So that's the base income, right? But then of course we want to consider that there are other income opportunities with servicing that includes the escrow income. So we talked about how borrowers have to remit part of the payment to, taxes and insurance, but they have an opportunity to earn income on that part of the payment. And this has, of course, become a much larger part of the value in recent years given the higher rate environment. could be ancillary income. Let's suppose you're a bank with cross-sell opportunities. There is definitely opportunity to earn income by selling other services to the borrower a couple of other opportunities as well. But as mentioned before, the servicer is actually having to service alone. So of course, there are going to be some costs that come into play. James Cahill (14:46) Yeah, so it's two halves. have income and a responsibility. Vimi Vasudeva (14:52) Yeah, yeah, exactly. sounds great, right? Until you remember that you actually have to do some work. James Cahill (14:57) Yeah, it's not quite a passive income stream. Vimi Vasudeva (15:00) not quite. the balance between those cash flows and the cost is really what's driving the value, which is why it's such an important part of pricing and profitability and so important for originators to really understand the value of the MSR. James Cahill (15:16) So once you, now that you understand what the MSR is and the importance of pricing, what is it that actually moves an MSR value? Vimi Vasudeva (15:25) That's a really good question, James, because, we can figure out what the value is now, but then how do you figure out how that value is changing over time? And I would say that the single biggest driver is going to be prepayment behavior. So when rates fall, borrowers are very likely to refinance faster, which means that the MSR owner's cash flows are going to end sooner, which then translates into MSR values going down. And then on the other hand, when rates rise, borrowers are likely to stick around longer. And so the MSR value is going to go James Cahill (15:59) So in a weird way MSR kind of likes it when rates are higher. Vimi Vasudeva (16:07) Yes, it's actually one of the few places in mortgage where people are quietly rooting for rates to go the other way. James Cahill (16:15) Careful which audience you say that to. That's a heated item. Vimi Vasudeva (16:21) Yeah, right? Know your crowd. OK, so beyond rates, we've got real world factors to consider, right? So things like delinquency, cost to service, escrow balances, remittance timing. And just to break some of those down, if delinquencies rise, servicer's cost to service those delinquent loans is going to increase, which, of course, would pull down the value. We talked about the opportunity to earn income on an escrow balance when we were looking at the positive cash flows. But then again, in a delinquency situation, the servicers on the hook to still remit that part of the payment to the tax and insurance agencies, but they're not receiving the payment from the borrower. So they're on the hook. That's a cost to them. generally speaking, delinquencies are going to make servicing more expensive operationally. And of course, that's going the value as well. So I would say in general, is absolutely the steering wheel and everything else is just kind of road conditions. James Cahill (17:23) Ooh, I think that's a good little line. I'm definitely gonna steal that one for pricing, you talk to MSR, everyone is always speaking about multiples. Can you define what multiples are and how we use them? Vimi Vasudeva (17:28) Feel free to. Yeah, sure. That's another important distinction for our audience. So an MSR multiple, you can really think about it as a standard valuation metric that's used in the secondary mortgage market. And it's expressing the price of an MSR asset as a multiple of its servicing fee. So technically it's calculated by dividing the market value of the MSR, which is stated as a percentage of the UPB, the unpaid principal balance, by the weighted average servicing fee. And this is important, right? Like someone might be asking, well, why would you do this? Why don't you just quote this in terms of price? But because there are varying degrees of varying structures in what the sort of, to what the servicing fee could be using a multiple provides a consistent normalized way to compare MSR values or MSR portfolios across these varying structures. And so to get into another numeric example, consider that we have a portfolio valued at 100 basis points. And so it's 1 % of the UPB. If in this scenario, the rated average servicing fee is 25 basis points, well, that's going to result in a multiple of four, because we're taking 100 divided by 25. and the multiples for. So it just provides an easier method for James Cahill (19:02) Okay, yeah, so it's just a way to boil all the different loans down to a single number so that you could compare the valuations. So with that, now that we know what an MSR is, what's kind of moving it around and how we should be talking shop on it with mults, could you speak a little bit to retained and released, this concept that you hear a ton about over an MSR? Vimi Vasudeva (19:26) Yeah, for sure. that's good transition, James, because when someone is considering whether they're going to retain or release, it is really important to look at all aspects of the cash flows does this mean in terms of what would my MSR multiple be if I were to retain versus release? So to answer your direct question, would really say at a high level, you're looking at the value of income today versus the value of potential income in the future. And so if you release, you're getting paid upfront, right? You're getting that cash immediately. There's no guessing about what's going to happen in the future. The servicing assets not your problem anymore. It's someone else's. Or it's not your opportunity, I should say. But if you retain, you hold on to a stream of these future cash flows. And you've got to kind of figure out what do these future cash flows mean for me today? How much can I depend on them? I.E. Would the cash flow still be around if rates decrease because the borrower is more likely to prepay, et cetera. So lots of things to consider there. James Cahill (20:33) Yeah, so really on the base, we're talking about is instant gratification in the form of getting the cash right now or delayed gratification in holding the asset and being able to service it over the longer period and getting cash throughout. Vimi Vasudeva (20:48) Yeah, exactly. guess one could say that MSR was the mortgage version of do I eat the cookie now or do I eat the cookie later? James Cahill (20:56) I know in my household ⁓ it goes quick. Vimi Vasudeva (21:01) Yeah, same. But right. So especially in the, you know, a tight margin environment, such as the environment that we've been in for quite a while now, cash can be really compelling, right? Like you want to sell the servicing to get the cash, but then you also have to think about if you sell that servicing, you're essentially selling the borrower relationship. you are giving up the opportunity to more easily get a chance to refinance that borrower when the borrower decides to refinance because you no longer have that relationship. And this has been a really hot topic in the industry over the last couple of years and we have talked about it on the podcast countless times so we won't spend too much time today on that. But it's of course an important thing to talk about when you ask how should one consider the retain release decision. And then finally, of course, you do want to think about operational capacity, right? Do you have the capacity or do you have the infrastructure to support servicing? if you don't, well, then of course, the answer there is that you should sell the servicing to someone else who can do that. It's really not as simple as it sounds. James Cahill (22:11) Yeah, so at the most basic it is that, hey, do I need the cash now or can I have it later? But there's more to consider. If you're having the cash now, you're giving away the relationship, which that makes cash flows later of a refinance or a second mortgage. You're kind of selling that away as well. But if you retain, you need to have a team that's able to process that. So it sounds like there's just a lot more than. just the easiest way of looking at it. Vimi Vasudeva (22:41) Yep, you got it. James Cahill (22:42) I, whatever I think, cause I came from the pipeline side. So whenever I think about MSRs, I'm always looking at like LLPAs and I'm going, okay, this borrower has a high or a low FICO score. So we are going to dink the price or the UPB is extra high. So, maybe Fannie wants it, but Penny doesn't. What are there any adjustments on the MSR side that would matter in the sort of way that an LLPA would on pipeline? Vimi Vasudeva (23:09) Yeah, that's a great question. So certainly there's going to be some overlap into what data plays a role in driving the value or assessing the risks of the MSR. I would say that one of the biggest ones is obviously going to be interest rate, right? Because that's going to determine the likelihood to prepay. We talked about that being the biggest driver of MSR value. So what is my current note rate? What is the rate that is being offered out there today? Do I have a chance to refinance and save on my monthly payment? But of course, there are many other borrower specific data points to look at to assess the propensity to repay, to prepay, sorry. one of those would be state. There are certain states in which it's very high likely, very unlikely for a borrower to turn over and get a new house or to refinance the loan. Another one is going to be UPB. And this one, you know, as you mentioned, the pipeline side, James, this is a pretty big one on the UPB side. especially as of late with the introduction of new spec pay ups, the investors and agencies are paying up for low loan balance pools, loan balance loans, because those loans are very they're not as likely to prepay even if rates drop because you only have a certain amount of money left only certain amount of obligation left on your mortgage. Are you really going to go through the effort? of refinancing your loan. would be another big one in terms of assessing voluntary prepays. Of course, you'd want to look at things like the borrower FICO and LTV to assess ⁓ involuntary prepay. So that means to assess the likelihood of a borrower potentially going delinquent. So I would say those are some of the heavy hitters. James Cahill (24:54) So it is kind of similar, right? Frontend, backend, pipeline, MSR, a lot of the same fields thinking about the same way. What's really going on is these guys have thought about, how likely is this to prepay? And that's kind of part of why they're valuing it spec wise. Vimi Vasudeva (25:09) Absolutely. Yep. James Cahill (25:10) Perfect. Well, Vimi, I appreciate the time. We'll be back for part two to talk a little bit more about what the MSR team does day to day, as well as how you might think about hedging an MSR. Thank you. Vimi Vasudeva (25:24) Yeah, it'll be my turn to ask you the questions, James. I'm looking forward to it. James Cahill (25:30) I'll be reviewing my notes. Jim Glennon (25:32) All right, let's close this thing out. Thank you, Alex, James, and Vimi. Great show. Appreciate the time, appreciate the knowledge. That's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.

Welcome to Optimal Insights, your weekly source for real-time rate data and expert capital markets commentary brought to you by Optimal Blue. Let's dive in and help you maximize your profitability this week. Welcome back to Optimal Insights. This is a bonus episode recorded at HousingWire's The Gathering featuring Sara Holtz, CMO at Optimal Blue. In this session, Sara shares a practical way to think about AI. Instead of treating AI as a shortcut or a replacement for expertise, Sarah frames it as a chief of staff. And the idea is simple, use AI to help organize inputs, surface patterns, and support clearer decision-making, especially when complexity is high. Sarah also walks through five principles leaders can apply right away. If you are looking for practical ways to apply AI while keeping judgment and leadership at the center, this conversation is a strong place to start. Let's get into it. I am thrilled to be here. And I'm especially thrilled to be here at the Women of Influence Forum because there's no better group to empathize that after three days of 85 % humidity, I'm in a ponytail on stage. It's not a surprise as leaders that our workload has multiplied. And not just in the tasks we have, but also in the decisions we have to make. What to prioritize, what to ignore, how we focus on what matters most. We're asked to move faster without getting it wrong. There's a real shift in how we think. In fact, researchers say that the average adult makes 35,000 discrete decisions a day. I would venture to say that's even higher for the folks in this room. In an industry where we have variable data, unpredictable markets, and much more related to putting people into home ownership. At Optimal Blue, we spend a lot of time thinking about tools that help leaders and lenders make decisions and be able to focus on what matters most. AI helps unlock amazing capacity. It reveals patterns, shows insights, and helps people make stronger decisions. Earlier this year at our summit, we launched a virtual economist, which is a comprehensive tool that allows leaders to look ahead in the market and help make better decisions. My responsibility in that development was to draft the descriptions for the avatars. that personalized the experience for the user. As my written descriptions morphed into faces, which morphed into voices speaking at the launch, I was reminded of the art of the possible. More importantly, it shows that decision complexity is real, especially for our industry. Now, as part of OB in the last two years, as I watched tools being developed, as I watched and realized that the purpose we're all in this room is to increase availability of homeownership for many, I started to wonder about myself. How could I be leveraging AI better? But first, let me take you back to a time in my career when I had a similar innovation pivot. This is gonna age me. Back in the late 90s, I worked for the parent company of Monster.com. Remember that recruitment company? At the time, websites were just starting to take off. And job hunting happened in a traditional way. You mailed paper resumes to companies in the address you found in the yellow pages. That's how I got this job. In fact, Monster Worldwide had a Yellow Pages division, an advertising division. That's the division I worked in. And at the time, there was a lot of question around what websites were going to do. to this industry. At first I was worried about my job as well, but being young and being hungry, I said, wait a second, what if I pivoted my skill set into a digital medium and learned how to write and market through this thing called the website, and thus launched a career that was built on changing and transforming channels backed by skills and experience. The lesson I learned back then stands true today. Technology transforms channels. It doesn't replace human value. So back to today, I start thinking, all right, I'm not going to worry about my job as AI is starting to take a hold. I'm going to ask a different question. What if AI acted like my chief of staff? Who as a leader hasn't needed an EA at all times, right? not a replacement for my thinking, but something to organize information, surface ideas, support my decision making. The first step I did was I started with our marketing team. Now look, we have a small marketing team and we have big shoes to fill for Optimal Blue as a market leader. I didn't want what we needed in efficiency to replace what I value in our work, which has to be true and authentic, authentic of marketing. Okay? So what we did is we took the tool that our company has and we created an agentic AI resource built on brand and style guidelines that we developed together. The entire team uses it to draft, to polish, and to help plan. In this way, every person in the department has a department intern. And it's truly, truly amazing. Now if... As a marketer, and probably for many of us in this room, we know the first draft is never the final product. It still takes a lot of human effort to turn early drafts into great outcomes. But there's no doubt we saved efficiency by using AI. I didn't stop with the team. You know, as leaders, the decisions we make every day are so immense. They happen at the same time and the same feeling of priority. In fact, I make the joke often that I feel more like a chaos coordinator than a leader. Now, I started asking again about this chief of staff concept. How can I use tools available to me to make my life more efficient, more optimized, and more organized? I needed AI to be operationalized as a cognitive consultant. And as such, I decided to name how I was going to use AI, Coco. So I could say, let me ask Coco. Now, it also happens to represent my favorite brand. So it works on multiple levels. But there's also a practicality to me using that name because I use it more intentionally. All right. So how does AI become your chief of staff? Well, through lots of trial and error, I've learned a few simple principles that have helped me leverage AI at work and at home. And I want to share those with you today. The first lesson I've learned is prompt with clarity. The clarity of what you put in the AI impacts the quality of what you receive. At first when I started using AI, I typed in, give me a marketing plan for this campaign. And I got what you expect, a generic, unusable, not very helpful response. So I tried again. I said, act like a CMO of a tech company who's leading the industry. Here's what we've tried before. Here's our target audience. Here's our competitors. What are we missing? And I did, I brain dump. An output came that was amazing, helpful, and helped move our plan into a direction that innovated how we were marketing. That same principle can apply for anything you do with AI. How you put clarity into your prompt is the quality of output you will get from AI. The second lesson I learned is solve the real problems. Do you remember when they did those memes for a while and you tried to follow the prompts to get the meme, but one arm was wrong? And then you tried to correct the arm, but it accidentally over-corrected the rest of the body? I'd spend hours trying to do uh one entry and fix. Not helpful, waste of time. So I reset. And on the day I was thinking about this, I had three critical meetings and two personal commitments, and I wasn't organized for any of that. We know that feeling, it's stressful. So I brain dumped into Coco again. I said, Coco, help me organize. What was scattered in my brain was structured in seconds, and I was able to deliver at the best part version of myself throughout the day. That's when I learned solving real problems with AI is the true meat of using AI. The third lesson I learned is target small and repeatable wins. You know that time at five 30 when you're exhausted from making so many decisions and some child who lives with you, walks in and says, hey, mom, what's for dinner? It suddenly becomes the hardest and most annoying question of the day. So I turned to Coco. I said, Coco, here's what we have in our pantry. Here's a typical grocery list. I have two children who are equally picky in completely different directions and a husband who needs to make a meal tonight. And Cocoa output a matrix of meal options structured for how my husband makes decisions. It was unbelievable. I was clapping while it was happening. That's when I learned small repeatable wins actually do create capacity for you. The fourth lesson I learned is to supplement your relationships. I'm going to tell you a tale of two Joes. Joe Holtz, my husband, and Joe Terrell, my boss. And I can tell you this, because neither of them are in the room. My husband is amazing. He's dedicated to our family. He's a loving, loving man. And we operate very differently. Where I'm focused on strategy and planning, he wants to execute. And our honeydew list gets lost in translation. So I turned to Coco, and I said, Coco, here's my list. I need Joe to execute this week. Can you turn it into a list he can manage? And it did. And I gave it to him. Wow, you finally understand how I need this list. So I tried again with my boss. Now for those of you who know, Joe Tyrell and I have worked together for a really long time at different companies. Well, he knew me back then in a different role. And as you rise to your executive roles, what gets you there is not the same thing you leverage when you're in the role. And I wanted to show up different to him. Now being Lebanese, half Lebanese, I'm very passionate, and I talk with my hands. So I went to Coco and said, here's what I want to talk to Joe about. But I want to show up this way when I talk to him. And Coco populated a couple of bullets for me that I used to talk to him. And it was amazing. And I felt really good about the conversation. So AI helps you show up better in relationships. It really can. And don't be afraid to brain dump in it. The fifth thing I've learned is to cultivate decision confidence. As a leader, There are often multiple paths forward. They all seem viable and none feel perfect. And I'm a type of person who will spin and spin on the right answer when nothing feels perfect. What will happen at D when I do ABC overthinking to the max. Now I leverage Coco and I say Coco here's what I need again brain dump. Here's what's happening. Tell me some options. Well, Coco has started to learn how I work. and I get replies like this. Here's my Cocoa recommendation based on how you operate. This is a real response from Coco AI on a flight I'm taking to New York next month. By leveraging how AI reviews insights, data, and how it learns your patterns, it's all pattern-based, you really can help cultivate decision confidence in moments when there are different options for you to decide from. How relevant is that for our industry with the challenge of the decisions we're trying to make every day for not only people getting into home ownership, but also for our business? It's incredible. Look, as leaders, we manage a lot of decisions. We burn a lot of capacity. We have a lot of priorities that we're managing. And there is no better way for us all to use AI than by these five simple things. Prompt with clarity. Solve the real problems. Target small and repeatable wins. supplement relationships, cultivate decision confidence. If you think about it, those five things are not just about AI. They're about also how you show up as a leader. I've seen the power of AI at Optimal Blue. I'm going to continue using Coco to show up as a better leader at work and home. And in both cases, AI is fundamentally changing how we make decisions and show up. The future of leadership is not about staying ahead of AI. It's about thinking better alongside it. Thank you. I'm thrilled to be here today. you

Jim Glennon (00:01) Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Hello and welcome everybody. Welcome, welcome. is May, which is just wild. I know I say that every month, but kind of letting that sink in. We've got a great show for you today. in the interest of making sure you know what to watch, whether you're an originator, a capital markets person, or just someone interested in the mortgage industry and some great market commentary. Keep listening in. We will start today with a market update, of course. It'll be James and I talking about a little bit of what's going on with the war in Iran, even though that seems to be sort of a weekly cyclical issue that doesn't seem to change very much, although it is continuing to push the you know, possibly the globe into some sort of recession. So we'll get into a little detail there. And then after that, we will have Mike and Brennan on to give you all a preview of our market advantage report lots of great data insights to talk about there. in a couple of weeks here, we've got the MBA secondary conference in New York city. So let us know if you'd like to meet up with us there. Hope to see everybody out there. Reach out to your relationship manager or reach out to me. or your, or one of my teammates, if you want to schedule something with us to sit down and meet, if we don't already have something on the books. All right. Before we get into market update, just a little bit of high level data, OB MMI holding in that range between like six and a quarter, 6.3, 6.4, not where we'd love it to be, but we have not seen a ton of upward pressure there. So that's a good sign. Part of the reason is spread between treasuries and and mortgages has remained relatively low. So the 10 year still continues to creep up a little bit. about close to four and a half today, where we usually see like a two point spread there. So we would be four and a half, six and a half conventional six, you know, the conventional still sticking kind of in that six and a quarter, six point three range. So good, a little bit of good news with some of the bad there. And yeah, let's get a market update going here. We'll meet up with James here in a sec and just talk about what's going on with numbers, but also what's going on globally. Jim Glennon (02:41) All right, welcome James. How's it going, man? I hope you had a good weekend. James Cahill (02:47) Thank you, Jim. Pretty good. It's always nice to have a background on Monday, isn't it? Jim Glennon (02:54) Yeah, why not? Kind of getting right back into the swing of things. I mean, it's got to be better than moving, which is what you've been doing the past couple of weekends. I feel like there's nothing worse, man. Like as far as activities go, can't get fired up for moving. It's exciting, you know, to move into a new place, but just the packing and the unpacking is just, it's dreadful for me. James Cahill (03:11) You Yeah, I always have a little fun for five minutes with, you know, playing Tetris with the back of moving truck. And then you hit the sixth minute and you're like, yeah, this is actually a nightmare and it's going to go on for hours. Jim Glennon (03:25) Yeah I'm good. ⁓ man. Well, sounds like you're on the downhill side. Almost, almost complete. James Cahill (03:36) Yeah, way more than halfway, so we're cleaning up. ⁓ Jim Glennon (03:39) That's excellent. All right. We'll give you a little bit of a reprieve from that and talk a little bit about what's going on in the world before we get to the market advantage segment here. So let's just talk current events first, because I feel like we should always be giving an update on what's going on in the Middle East. Even though it feels like Groundhog Day every Monday morning, you know, we're still not sure who controls the straight of Hormuz. We, know, oil's up again this week. which is not surprising. There's more escalation. There's more kind of conflicting news between the White House and the Iranians as far as who's in charge, who's signing off on what. So anyway, it's just kind of still chaos on the other side of the planet. There is still this energy crisis that I feel like we in the US are somewhat insulated from. You and I were just talking about how there's, you know, there's different kinds of fuel, obviously. Like we have a lot of natural gas here, so not a big issue there. We also produce oil here, but we're not totally self-contained. Like there's always this, this graph you can go look at online that'll say we're energy independent, right? But we're not truly energy independent. We are sort of energy, like we are net exporters of energy, put it that way. But we still import a ton of, of things like jet fuel, you were pointing out, right? We don't refine a ton of jet fuel here, even though we might produce the oil that comes out of the ground that eventually goes into that fuel. Some of that is done on the other side of the planet in the Middle East where you currently cannot get to. So there's this, you would you call it kind of a COVID style, what did they call it? A supply chain disruption has been in the works for the last two months, right? James Cahill (05:29) Yeah. So I would phrase it, maybe this is a way to put it, right? But the United States would like for oil to be flowing through the Strait of Hormuz. If we perfectly controlled the strait and it was absolutely safe, oil would be flowing through. It's not. Jim Glennon (05:44) Mm-hmm. James Cahill (05:45) So who controls it? That would tell me not us, right? We might have more and better military hardware there, but it's not insurance companies. The lives of the people in general, the tanker companies themselves do not feel comfortable sending things through. So it's not going through. A large majority of the world's jet fuel is actually refined over in the UAE and Saudi Arabia. So while we might be pulling it out of the ground here, it gets sent over. Jim Glennon (05:50) Mm-hmm. James Cahill (06:13) to Saudi Arabia to get refined and then it comes back around. That's why you've been seeing things like flights getting more expensive, know, within that Spirit Airlines. pulling the plug on themselves saying, we can't do this anymore. So interruptions to the economy. America is resilient. We do have a lot of natural gas. We do have a lot of oil. So heating and electricity might not go up too fast as long as you don't live next to a data center. But that doesn't mean jet fuel is not going up. So transportation costs are not going up. So all of the underlying costs are not going up. And the final tiff to that is, you know, yeah, the United States is insulated, but our largest trading partner in Europe Jim Glennon (06:23) Mm-hmm. James Cahill (06:51) Europe is not. And so if things are bad for them, you if you run the store and the economy is not so good for all of your clientele, it's not so good for you. Jim Glennon (07:06) Yeah, I keep hearing more and more about it. Yet we are seeing record numbers in the stock market every week. I cannot reconcile that. I think you're starting to see more journalists come out with opinions or, you know, they're interviewing analysts, obviously, that follow these sort of things more globally. And while, as you said, we're very resilient in the U.S., the consumer is still spending. We have, you know, maybe the Y-shaped economy or sorry, the K-shaped economy is a good thing in this case because you have the well-to-do continuing to see their 401ks and their portfolios increase in value. So they're continuing to spend on high ticket items that keep consumer spending numbers up. But to your point, Europe and Asia, almost all of our top trade partners in the kind of the first and second world are hurting badly from some of this. James Cahill (07:34) You Jim Glennon (08:01) disruption and it, me, jet fuel is just the tip of the iceberg. And I think you alluded to that with that's like the first direct costs, like jets need fuel to run Spirit airlines partially went out of business. mean, I don't know that they were very well off to begin with, but, but a sudden spike in jet fuel prices that they did not hedge against meant that the tickets that they've sold for the next six months and the flights that have already taken off in March and April, they were probably underwater on those are close to it. You're going to start seeing that bleed through. James Cahill (08:13) Yeah, there's more there. Jim Glennon (08:31) to other parts of the economy. It has to. Everything has to get from point A to point B for somebody to buy it. And I feel like we've yet to see the impact of that across all types of other items, just like we did back during the COVID supply disruptions. It's like right now, maybe companies are eating some of that cost, but eventually they're going to have to pass it through in the way of profit margin down to us as consumers. James Cahill (08:55) And yeah, exactly as you're saying with COVID, like back during the COVID supply shocks, right? We shut down the entire world, but we didn't shut down essential workers and services, right? And oil was one of those. If you worked on the oil rig, you kept working. And if you were a truck driver, a tanker operator, you kept going. You kept the world economy moving. Right now, that is the gears are stopped or slowed there. So it's not just, hey, you know, it's kind of like Jim Glennon (09:11) Mm-hmm. James Cahill (09:25) COVID, the economy is just in a weird shape. No, the main lubricant is held up. Jim Glennon (09:32) Right, so to speak. we've, you know, I think over the past 100 plus years, we have deemed oil to be an essential resource for everything from our military to transportation to people. So during COVID, as you said, that was one of the things that didn't stop moving, yet we still saw inflation close to 10 % during those supply chain disruptions and the extra liquidity and all that. But now we're saying James Cahill (09:34) Yeah. Jim Glennon (10:02) One of the reasons potentially that we are engaged in a conflict in the Middle East is because we were looking to better secure supply of oil. But in doing that, in trying to reach that objective, we've essentially shut off 20 to 30 % of the oil that flows across the world. And that's not something we can just turn back on on a dime if and when we resolve this conflict. feels like the stock market's shrugging this one off and maybe shouldn't be. But I've been surprised before just by the sort of anti-gravity nature of the equity markets. We seem to be just looking way past this and thinking that we're going to be better off for it. So anyway, more to come there, but does feel like there's probably some pain, at least globally, in terms of a possible recession. And I think if we were living in Europe or Asia, we'd probably be feeling that already. But it's yet to make its way. across the ocean. All right, maybe off of that seemingly dark topic, getting into some more current numbers. So last week, probably Chairman Powell's final FOMC decision, final press conference. You know, the Kevin Warsh confirmation seems to be going through just fine, although there's lots of questions there that we will likely help everybody answer. James Cahill (11:04) Yeah. Jim Glennon (11:26) over these coming months in terms of some of his testimony, but just getting to the FMC decision, nothing big there, right? We had no cut, no increase. We had a pause and a little bit of, I don't a little bit of questionable language though, I think that led to some disagreement amongst the Fed. James Cahill (11:42) The two interesting parts are definitely first, as you alluded to, was Powell's last meeting as ⁓ the chair. it was the hang on there was whether or not he was going to continue at the Fed, see the rest of his tenure out or whether he was going to leave. He's chosen to stay. effectively stated that he felt the pressure the administration had put on him over the past year was a It was really a phantom, something that they couldn't really work past. And the only way for him to get through that menace was to see the rest of his term through. So he'll be sitting in for a couple more months. No longer the Fed chair as Walsh should have made it through. There are some questions in the confirmation hearings around how he feels about Fed independence, which we'll be talking. will also say during the minutes. Jim Glennon (12:32) Mm-hmm. James Cahill (12:37) they, there was some dissents, Mirren dissented as he did want to cut. there were three other dissents saying, we don't like the language in our announcement, effectively hinting that next time will be a cut. They wanted to strip that out, say, hey, we are very unsure or we're pretty sure we're gonna be staying. pushed future projections to be flat for the rest of the year. And I actually see about a 25 % chance for the CME of a rate hike come December, but that's pretty far out. So those. Jim Glennon (12:49) Mm-hmm. Mm-hmm. James Cahill (13:09) you always take six to seven months out with a grain of salt. Jim Glennon (13:14) Yeah, obviously a lot can happen and you know, just based on our conversation a few minutes ago, it does feel a little, I don't know, premature, a little bit maybe unwise to hint that we're going to see rate cuts in the next meeting when it seems likely that we've only seen the first shoots of inflation that are just going to get worse if we don't see it into this, you know, this war in Iran. James Cahill (13:38) So with that, last week also, PCE came came out at about 3.5 % year over year, 3.2 % core. It's important for a couple of reasons PC is of course the feds preferred measure of inflation So this is what they're looking at the target being 2 % We've been saying like oh 2.7 2.8. That's a little high, but you know, maybe it's a new normal 3.5 is is decently high. That's not where you want it. You don't want it three You don't want it above three. So Last time around last month it was 2.8. So it's a point seven percent increase the second reason that this is Jim Glennon (14:06) Mm-hmm. James Cahill (14:17) actually a notable number is because if you look at core, which is energy and food prices stripped out. So we're ignoring the fact that gas has gone up, which most Americans would say is a price they're not ignoring right now. But if you strip that out, that's goods and services that have still increased by % since last month. So that is a, it's a hit that matters. It's going to show up in people's wallets. And again, it's, it's stripping out oil and gas. So if you look at gas prices nationally right now, it's basically 450 for a gallon of gas. It's 110 barrel dollars per barrel for breads as of time of recording. And the CEO of Exxon was out here saying, I actually think that we could see that get worse. So. Jim Glennon (14:44) Mm-hmm. Mm-hmm. James Cahill (15:11) you know, the idea that, we're going to kind of coast through inflation. It's not that bad right now. This is the first number showing, it is not where we want it. I don't see a rate cut coming with it. And ⁓ it's going to be a minute. Jim Glennon (15:27) Yeah, mean, the Fed is still taking, you know, still taking criticism for using the word transitory when we last saw a bout of inflation that some would argue isn't even over yet. And now we're seeing it start to bounce up closer to 4%. Again, it seems, I don't know, it just seems unwise for the Fed to kind of almost ignore that and say, yeah, we're, you know, we're thinking about the next move being cuts because we see more weakness in the jobs market than we see risks. to inflation. some of that just feels like, you you hear that from CEOs of banks and you hear it from analysts right now that this is going to be short lived and once the war's over, we're going to be back to normal. then you read in other areas that oil, high oil is here to stay for a very long period of time for other reasons, not the least of which is the supply chain disruption right now. So. I don't know. I'm usually the optimist, but my take on this is it does feel like we're being a little dismissive of some of the risks out there because we feel like everything's cool back here, stateside, while the rest of the world is suffering pretty bad and we kind of need them with a lot of it. We're still a very global economy despite the changes that have been made by the administration. James Cahill (16:46) Yeah, and exactly as you're saying, the hope is that this is a one-time shock that, well, now gas costs 450 and it'll just stay there. there's no, you know, there's no cap. There's no deal that that's the case. If this continues, gas could get more expensive and everything else will inflate as well. So it's not. Jim Glennon (16:58) Mm-hmm. James Cahill (17:13) If it's a one-time shock, it's almost certainly not done yet. So that implies it's going to keep trending. Jim Glennon (17:17) Yes. Yeah, and you've pointed out fuel prices always go up much faster than they come down. So even if they are destined to come down, you know, it took two months to get where we are here. It could take nine months to get back to where we were. If we ever see that or the gas companies see the margins sustaining themselves. And we just come out of this with just fuel that costs more because there's more risk there going forward. And that's how it's rationalized in the market. All right, so what else do we have this week? We have jobs. James Cahill (17:54) Yeah. Yeah, so this week we have the other side of the coin, right? It was all kind of inflation news last week, now it's jobs. could hope, hey, well, if there's a little bit inflation, there's a little bit more speed of money, a little bit more hiring perhaps. But so far it's not a... projected as a phenomenal growth. we'll see Wednesday, we'll see ADP, which is expected to be around 100K ADP of course, is a private payrolls. So it's not as robust as the government says it tends to be a lot more volatile, but it's always just a good number to get you kind of a ⁓ inkling of what's coming. Jim Glennon (18:24) Mm-hmm. Mm-hmm. James Cahill (18:37) On Thursday, we'll have the weekly jobless claims. They're expected to increase to two hundred and five K. That's about where they've been sitting. It's not much of a increased decrease. That's kind of that's what we've been seeing. And on Friday, we'll have the actual U.S. employment report. the speculation on it is it's going to be fifty three K, which is it's a pretty anemic number. It's not. Jim Glennon (19:01) Essentially zero, yeah. James Cahill (19:02) Yeah, it's not where we want to see it. number two is the unemployment rate. It's currently at 4.3%. It's projected to stay at 4.3%. I think if we see 53 or lower, that that will creep to 4.4. Jim Glennon (19:16) Really interesting numbers and it's increasingly hard to decipher because of the relatively major changes that have happened in the labor market the past couple of years. But yeah, as you said, anemic numbers yet relatively healthy unemployment rate because this economy right now doesn't need to create a ton of jobs to keep everyone employed. Thursday number, so the initial claims number, that I think last week that number hit a low for the past like 30 years or something, right? Like barely, it to get below 200 K on initial claims is pretty exceptional. And it's a relatively reliable number because it's basically how many people have applied for unemployment benefits, right? So it's not a survey like the BLS report, but it's something that is an indicator. of the jobs market and seems to indicate really good health in the jobs market versus when it gets up closer to 250, 300,000. And that's when you see you're, you're, feeling layoffs. You're people that are having difficulty finding a new job effort. They've lost theirs. Anyway, that's a fun number to keep an eye on because it is real time. is weekly. And it broke a record, know, broke a record or at least came close to a record last week. James Cahill (20:34) But it's definitely, know, jobs wise, this is the week to be watching. That gets us the two halves of the Fed's mandate. So that kind of, you know, wraps all this together with the Fed inflation and jobs. too many other critically this week. The final point I have is the OBMMMI sitting around 6.3 % this morning. Jim Glennon (20:53) Mm-hmm. Yeah, that spread is hanging in there pretty low, which is good. At one point we were seeing the LBMMI, you know, closer to 2 % above treasuries, but now we're more like 1.8, 1.85. So the, yeah, the 10 years closing in on four and a half, but we're still seeing like low sixes with 30 year conventional. So that's pretty, pretty healthy. So yeah, we'll see what happens on Friday. Again, you've got the Fed saying they feel like there are. Weaknesses in the job market that are sort of latent at this point. I guess you can't see them in the numbers and everybody kind of feels that But yet the numbers seem to show health there. So this whole Idea that we could see a cut the rest of the year doesn't seem to be where the money is pointing but it's Where the Fed is placing their language, which to me means they're placing some of their bets in that in that category anyway Time will tell All right, James, I think that covers everything for this week. We will now check in with Mike and Brennan. We're going to see what's happening with Market Advantage says, as you know, we now once a month, we have the Market Advantage kind of preview, right? The report has not come out yet. It'll come out next week, but we choose some data from that that report, and we discuss it live on the podcast. So. Let's hand it over to Mike and Brennan and see what observations they have about market data this week. James Cahill (22:29) Thank you, Jim. Jim Glennon (22:30) All right, thanks, James. Mike (22:32) Welcome to the latest edition of the Market Advantage podcast for Opimo Blue. We're going to be diving into all of the data that Opimo Blue produces for the month of April. been an interesting month just with the gyrations and the rate market. Brandon, why don't you tell us about some of the comings and goings from the data perspective. Brennan (22:51) Yeah, interesting is maybe a generous term, so obviously the market was impacted. The origination market impacted by a tougher rate environment to sort of distill it down into the punchline. April lock activity pulled back following a very strong first quarter. Total lock volume was down 9 % month over month, but I some strong signals when you look at the year over year. metrics, we were up roughly 11 % year over year. So continued improvement over 2025, despite some of the headwinds in the rate market here to kick off Q2. Purchase activity remained relatively resilient, which I think is really a welcome sign that that's a market that for a variety of reasons, we've all been keeping close tabs on with the lock-in effect wanting to see sort of a return to pre-COVID levels. at least sort of at the median here. So the purchase lock volume declined just 2 % month over month, but was actually up 9 % year over year. So, please to see that refi activity moderated as you'd expect. So rate term volume down 38 % month over month. Cash out declined 12 % month over month, but both were still up on a year over year basis, 22 % for rate term. And 11 % for cash outs up year over year. ReFi share slipped to 23%. So under a quarter of total volume. think that is really just a reflection of the, refi market reacting. And then the, the sort of stability that we're seeing in the purchase market here as we move into the spring buying season, on the rate side, higher from the vast majority of the month than we had been in the previous couple of months. we technically finished the month down. If you just look at sort of where things finished March and at the end of April. So the OBMI 30 year conforming rate, again, the benchmark for the CME futures contract. I finished the month at 6.31%. That was down four bips month over month. But up 25 basis points from where it had been 90 days earlier. And then jumbo rates ended the month at 643 FHA 606 and VA still below 6 % at 5.9. The 10 year was up, up to 440, basis point climb month over month, but the 10 year to 30 year spread, 30 year mortgage rate narrowed down to 190 basis points. So we did get in terms of TBAs outperforming treasuries in April. Army utilization came down a little bit. had been 11, 12 % down to just above 10%, but I still think you see folks opting for adjustable rate mortgages here, particularly at the higher loan volume cohort in the market. Product mix shift. The big note here is conforming volumes fell below 50%. So they've been hovering just above 51, 52%, but actually into the 49 here, handle for the first time since we've been tracking it. think you do just see this continued movement both towards kind of like the non QM non conforming production, as well as towards Gubby products, which might be a little bit more affordable right now for first time home buyers. It is interesting because we talk about how loan limit has just continued to increase. But despite that, you see sort of trend away from the agency eligible. Lending. we'll see how that continues, but, sub 50%, that's certainly something of note non QM lending, I mentioned, stable part of the market here, hanging out in the eight, nine percent range, no real change month over month. But again, I think we just, if you look at where it was last year, we're still up a couple, a couple points above where it was in 2025. And let's see other, other points worth noting. I'd say affordability metrics. So, so despite the tougher rate environment, affordability. Metrics didn't really change much the DTI's across all loan products were pretty consistent from March to April. So I think you probably just had folks Who were maybe in a position? Where they would have been more impacted by the rise in rates probably just not ⁓ moving and taking out loans in April I think that's it for the origination side, but probably kick it over to you. know you had some interesting observations on the secondary side. What did you see in April, Mike? Mike (27:23) Thanks, Brandon. And one of the things that stuck out this last month was ⁓ the environment kind of in general, seemingly a little bit more positive on the capital market side. So first we saw generally the best effort mandatory spread increase for conventional product of about three to four basis points on average for conventional 30 in the 15 year. GovV30 was down. so how I think about this is that's like the extra incentive that lenders get to hedge. and manage the interest rate risk until the point of funding, Converso best efforts, that interest rate risk goes to the person you walked that loan with. And maybe with some of the volatility that we're seeing, we might see that spread and widen a little bit, As the larger lenders and aggregators want to be a little bit more defensive, given as you move between different rate environments, your hedge cost is going to... is going to go up a little bit. it's a positive for folks who are using our software products or our services as that Another interesting trend was, past couple of months, we've seen loans sold to the cash window gain more and more share our loan sales. And this month, we saw it of bounce back to the MBS securitization outlet. went up almost about three points from going from 41 to 44 % of what we see loans sold on a monthly basis. The kind of leading theory right now is, you could we saw rates rise, servicing values increase. And if you want to actually retain that loan instead of selling that loan to a larger lender or an the economics might have made more sense. And then we mentioned you home prices going up. mentioned the conforming limit going up. We've seen more more specified pool stories start to build up as well, could also be feeding into the ⁓ shift back to MBS as lenders start to look at these newer specified stories or, or any type of like pooling strategies. The economics could just make more sense now for that. And we saw very stable numbers across where folks are selling their song loans. We saw just a minor change between people selling into the third and then the fourth or lower cohort, but not really much to change there. The other two pieces that I want to call out MSRs increased in value this month, which makes sense on average. It wasn't up and down month, but on average rates were up over the course of the last 30 days. And with that, we servicing like an interesting mark for us where it was above a five multiple. it was up five basis points to a 1.29 price. And so that five multiple is a really interesting spot because back before COVID, the common servicing multiple was a four. And then as we saw appetite for servicing rights change throughout the course of COVID, and we've seen folks invest more in recapturing retention strategies, we've seen that value drift even higher. Well, you'll see trades done in the six are a little above a six multiple, but to see new originations at that five plus multiple is interesting a variety of reasons. I think recapture is a big part of it, that continued importance on owning that borrower relationship. And you've seen it in some of the M &A news in the industry as well. Everyone is valuing that at a very material level. So that's something to be watching. And then this last one, it kind of goes in the same, potentially the same vein here, is we saw our investor count increased this month. So this stat tracks the average amount of investors who actually bid on a loan sale when our lenders are selling loans. And so, you this is at 14 for the last three months and it just bumped to 15 this last month, which means there's been some additional folks coming into the market maybe just being more aggressive and, you know, bidding on more loans that we're seeing in the system right now, which I think all these signs kind of point to like a bit more of a positive spin. on the capital market side, where I think the takeaway is when there is some of this volatility, there's also opportunity. It's not always bad when there's volatility. There's more work, potentially more thought exercises you have to do, but in general, there's also opportunity there, which I think is kind of like my larger theme for the last month. Brennan (31:42) That's great. Yeah. I feel like that theme carried across both the capital markets and the origination despite a tougher rate environment. And we're hearing it from clients, right? It seems like folks are the rate headwinds and stride and folks have some optimism here and looking forward to seeing everyone here at MBA secondary in just a few weeks. Mike (32:05) Yeah, except for MBA secondary, I'm excited to get the pulse on the ground there. It'll be interesting. think even with some of these rate moves, there's been so many head fakes and up and down movements the last four years. I think generally the industry is like prepared for this now, whereas I don't know if I would say the same thing in like 22. I think it's hardened the industry in a positive you know, these like kind of rate moves that we've seen in some of the other industry trends, consolidation and things like that. But looking forward to seeing everybody at the secondary be back next month. Brennan (32:38) Thanks all. Jim Glennon (32:39) All right. Great podcast again today as usual. Let's close this thing out. Thanks so much, James. Thank you, Mike and Brennan for the update. That's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.

Jim Glennon (00:00) Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Hi, welcome everybody. Thanks for being here. We have a great show as always for you today in the interest of making sure that you know what to watch, whether you're an originator. capital markets person or just someone interested in the mortgage industry and some great commentary. Keep listening. We'll do a market update here in a little bit with Alex and James. Of course, a ton to talk about. We got the Fed meeting coming up this week. There's some happenings over the weekend. We'll touch a bit on the conflict in the Middle East and then some interesting economic releases coming out as well. And we'll even preview a little bit of the unemployment report coming out next week. After that, have a special guest, industry luminary Jeremy Shires will be joining us from Westgate Bank. We'll talk through some issues that are sort of flying under the radar right now in terms of laws and regulation around our industry. There's obviously a ton going on geopolitically and other things going on in the news. So we will spend a little time just focused on what's going on in our industry. First in the way of data, we have the OBMMI at roughly six and a quarter percent right now. So a little higher than we'd like to see it. higher than that five handle that we were seeing late last year. The 10-year treasury is at 4.33. So still seeing a little bit of compression in the spread between mortgages and treasuries, but still would like to see both of those numbers a little bit lower. All right. Let's go check in with James and Alex to see what's going on in the market. Jim Glennon (01:59) Alex and James, welcome. Excited to talk to you today. I have a few things in the news. Some of them kind of scary things, but some of them potentially encouraging. Yeah, I mean, we're, you know, not much of a reaction to the security breach at the correspondence dinner over the weekend, but that was big news. I believe that was Saturday night. That was, that was kind of scary. Hopefully you all saw that. If not, take a look at the. at the news roundup on Sunday morning. But yeah, James was just telling me here that, you know, we were kind of contemplating what the succession plan would have been had, you know, God forbid that had gone a lot worse and ⁓ grassly, I believe you said would be running the government today. Had there been a horrific end to that situation? James Cahill (02:49) Yeah, they're like... the next in charge who wasn't in that room. if something, again, as you said, really horrific had it's like 94 year old Democratic Senator Chuck Grassley would have been in charge. So we would have had the oldest president ever again. And he would have beat it out by like a decade. So that would have been definitely more of that. Jim Glennon (03:13) Right. James Cahill (03:18) But luckily Secret Service did. ⁓ Jim Glennon (03:20) Good bit. James Cahill (03:23) I did catch the runner. Jim Glennon (03:28) Yeah, did an amazing job. Thank goodness that it worked out the way it did. yeah, that would have been, we'd be looking at a completely different world had that gone differently. So that is kind of sobering. no market reaction to that seemingly, but. I don't know, in the way of geopolitics, is there really anything notable today in the way of the war? mean, there's more, it's just more kind of hearsay of possible discussions about reopening the strait, ending the war, but I don't know, oil's up again. So I feel like if you're following the money, there's almost no credibility to any of this talk over the weekend. Alex Hebner (04:05) Yeah. Yeah, we had it into the weekend looking a bit better. sounded, there were rumors that Jared Kushner and Steve McCofford headed back to Pakistan for a second round of potential peace talks. And then I think it was Saturday sometime that it was announced that those were canceled. So that's, that's led to the run of the oil we've seen, but really there hasn't been any change to the situation from, from last week. The fighting is not active on the. Jim Glennon (04:19) Mm-hmm. Alex Hebner (04:30) Iran, US front, there's some skirmishes between Israel and Lebanon, or rather Hezbollah in Lebanon. But from a US market's perspective, it's steady as it goes in regards to just waiting for some peace talks to develop. Then as of right now, there's nothing on the books. Jim Glennon (04:50) All right, so we'll keep you apprised there obviously. We'll probably have a bonus cast if something big happens, but I don't know. What do you think, James? What's the best case scenario? What are we looking forward to right now with the war in the Middle East? James Cahill (04:52) Yeah, I know. Alex Hebner (05:00) you James Cahill (05:03) Well, they'll move forward, right? They'll be negotiating by phone, which that sounds a lot like ⁓ some will they, won't they romances that ⁓ I've seen people having their lives and those have been less on and off than this. It seems like we're going to be stuck here for a while, which is not good news for anyone. Jim Glennon (05:12) Yeah. James Cahill (05:24) Gas prices nationally, it's about $4.10. California and the West Coast are worse than that. The middle of the country is doing better. They're in the mid three and a halves, but still it's up quite a bit from this time two months ago. No real end in sight. Jim Glennon (05:25) Mm-hmm. Yeah, yeah, still almost completely choked off more than 20, 20 ish percent of the world's oil or energy, you know, unable to make it through the straight. know, you know, Denver's a little bit insulated. We have a refinery here. We actually drove by it the other day and my wife was, ⁓ you know, kind of regretting the smell that the refinery makes when you drive by. I said that, you know, that's, that smells got to be good right now. I think it's a reason why our gas is about a buck cheaper than it is anywhere else. And I think, believe our energy exports are also up, I mean, weird kind of positive side effect because we do have, you know, produce relatively large amount of energy given the population of our country. It's not, probably not sustainable in the long run, especially when you get into the different types of oil that are traded around the world, the type that we produce versus the type that we refine. But nonetheless, again, we're a bit insulated, not just geographically, but also in terms of the energy crisis that's going to hit Europe here pretty hard in the very near future, I think. Alex Hebner (06:46) Agreed. Yeah. I don't know if we talked about it last week, but there's just been rerouting of ships that have been waiting to enter the straight-up form. It's all this time in the past eight weeks or so. Those have been rerouted towards, towards golf ports here in the U So yeah, it'll put more demand on U S exporters where we are in that energy exporter at end of the day. But at the same time, from everything I've read, doesn't seem that the U S oil majors are pumping at full capacity right now either. So there's probably still a little bit of supply to unlock. Jim Glennon (06:59) Mm-hmm. Mm-hmm. Alex Hebner (07:16) but they're also, they're taking their profits right now. Jim Glennon (07:18) Yeah, that's, you can kind of name your price in a market like this, right? As long as this disruption continues, we'll probably continue to see oil prices go up and that will encourage more capacity coming online, right? It just encourage more production as long as, especially if these huge oil tankers are coming into the Gulf and they're hungry for it. All right. What did we get in the way of releases last week? Any numbers that we should be focusing on here? Maybe not just numbers. think James, you had a couple of interesting factoids from the BBC. James Cahill (07:51) Yeah, I mean, you know, the only real number from last week was consumer sentiment being revised. It was pushed up to 49.8. It was 47.6. That's still the lowest it's ever been recorded, but we are at war and there is an oil crisis. So it makes some sense that that should be a little scanty as a number. the only real big release from last week. But I do have, know, unless you're a ⁓ big Beatles fan and you saw Ringo Starr released his latest album, ⁓ Jim Glennon (07:57) 49. Mm-hmm. James Cahill (08:24) long, long road. So that's a major release from last week from my end. Jim Glennon (08:30) That's pretty, it's pretty important, especially for the folks across the pond there. I think that's worth noting. I mean, how old that guy's gotta be? He's gotta be almost as old as Grassley at this point. And he's turning out, you know, his 22nd album. That's pretty impressive. James Cahill (08:45) Yeah, he should run for Senate. Alex Hebner (08:47) You Jim Glennon (08:49) Uh, this week, we've got a few things this week. We've been talking about the Fed. We do have the Fed meeting coming up on Wednesday. I mean, roundly expected to be kind of a nothing event. I think other than it almost certainly at this point being Jerome Powell's final meeting as the chair of the Fed, no rate cut or rate hike expected. Maybe a change in language, hopefully something around how the Fed is viewing energy prices and just general economics around the war. But anything else you all think we should be paying attention to in this FOMC announcement on Wednesday and subsequent press conference? Alex Hebner (09:33) My only thing I'm looking for is in the crash conference, seeing Powell likely continuing to pivot the narrative towards a focus on inflation as he did it is at the last meeting. We were joking after the last meeting about how inflation was running higher than they would have liked it to, and they didn't get it down to where they would have liked it to, which was an admission that was many years probably in the making. But yeah, this is Powell's final likely. Jim Glennon (09:43) Mm-hmm. Alex Hebner (10:00) much more likely final meeting. ⁓ got the DOJ dropped the charges against Powell, which was the kind of self-imposed hurdle that the Trump administration has put themselves in at this point, wherein Powell's being investigated. Senator Tillis, who's on the Senate banking committee, said he wouldn't allow any of Powell's successor candidates to be passed through the committee until that case was resolved. The case has now been resolved. It was dropped. I don't see any reason that we won't see a Warsh confirmation at this point. Jim Glennon (10:33) Right. Yeah, that's huge news. That was hanging out there for a while and folks are kind of wondering what gives. Like somebody has to back off or Powell sits in office or the White House figures out a way to fire him or whatever, you know, which just seems like a big old distraction that nobody really needed. thankfully those charges, criminal charges against Jerome Powell were dropped. So yeah, it will be his last conference almost certainly. Yeah, you almost wonder though, maybe he does have some final words. It's been a pretty long tenure for him. He's been a little more open, a little more candid in these last couple meetings. Maybe he gets extra candid. Maybe it would be interesting and possible a little bit of drama there in his, you know, the way that maybe an outgoing president might have words for the nation, just words, whether it's words of caution or with the inflation thing, it sounded like words of regret almost. Like we kind of almost admitting that we could have done A lot better than we, than we did. Anyway, it's worth, it'll be worth a watch. Alex Hebner (11:37) Absolutely. But yeah, from the rate front, we're expected to sit at the market rate for a good while here. So no, no change expected there. Jim Glennon (11:47) Otherwise we do have PCE coming out coincidentally the day after the meeting. And that is the fed's preferred inflation metric. It's expected to be up obviously like every other inflation metric right now, mostly because of energy. Right. I think the year over year expectations is 3.5 well above the fed's mandate. Yet we probably still won't see a rate increase because I believe the fed would still consider this type of inflation to be transient, which is a word they probably won't use again because of some of the jokes around it from the previous bout of inflation that we had after COVID. Alex Hebner (12:28) Yeah, transient and then largely supply driven, supply side shock driven. There's really nothing they can do about a shortage of oil. You know, they can hike rates, but that's just going to cause more damage to the economy than what we're already feeling from that oil shortage. So they kind have to sit on their hands in a situation like this. Jim Glennon (12:40) Mm-hmm. Mm-hmm. All right, so watch for that number Thursday. then Kevin Foley's favorite number also comes out on Wednesday. We will get quarter one GDP. Sorry, that's Thursday, I think. Quarter one GDP, which yeah, Kevin has kind of pinned as a throwaway number just due to a lot of dynamics around things like seasonal adjustments and holiday spending and this sort of thing. But nonetheless, that's coming out. been pretty good at triangulating GDP. GDP is rarely ever a surprising number, right? And that's one of the other reasons I think that people don't like to look at it too closely unless there's a major deviation, because you can kind of get there with a lot of other releases that come out pre-GDP. Is that right? Is that how you all would look at GDP these days? James Cahill (13:38) I would agree. It's also, it's difficult to translate GDP as a headline number into it means for the average citizen, right? Like per capita GDP is a little bit more telling. We're all producing $150,000, $200,000 worth of stuff every year, sure. But that GDP number is driven by imports and exports a lot right now. So, you know, what does that have to do with you working your nine to five? It's the number could be really high or really low and it's not very reflective of. how the average citizen is doing. it's a little bit of a more and more of a washed out number right now. Jim Glennon (14:16) Right? Yeah. Unless it's negative for multiple quarters in a row, right? Then you can say that we're in a recession or that the economy is shrinking, but otherwise it's, yeah, how much does the average American care about how quickly the economy is growing? Cause you can get that from a lot of other things like company earnings, which we're getting a deluge of that right now, which is pretty interesting to seeing the pretty significant increase in earnings, like across the board in corporate America has been pretty. I guess encouraging, you know, it's almost as if, I don't know if it's kind of the after effects of inflation or, you know, you look at the big banks, it's a lot of just a ton of trading going on, whether the market's up or market's down, just a lot of trading activity, just revenues are up, earnings are up. Some of that's attributable to AI, but it seems very unlikely that that's a major contributor right now. Just, I don't know, corporate America just seems to be happy at the moment. Again, how does that translate? To us average joes, hard to say, but it does feel like the stock market gains that we've seen over the last few years are potentially coming true, at least so far. Alex Hebner (15:28) Yeah, great. If you're looking at earnings, the picture looks pretty strong. Margins are strong. And this week, if you're keeping anything on your radar, number of the big tech companies are all reporting on Wednesday. ⁓ Google, Peta, the ones with massive AI capex, which is going to be a good metric for the equities markets for sure, since they tend to be the front runners. Jim Glennon (15:52) Yeah, right back to betting on the Magnificent 7 or whatever you want to call them, right? Big tech, big banks. So looking forward to that. guess the only downside of that for our industry is it becomes less likely that we see lower rates in the near term. still bouncing around six and a quarter for 30 year mortgage, which is not the best, but nonetheless, we're seeing decent volume continuing to come through even with that elevated rate. We're just seeing the new normal. start to pick up speed where, you know, whether it's life changes or, ⁓ just different dynamics in the market. The purchase, you know, market right now for homes is, is, is pretty healthy and seeing, you know, supply continued to creep up, seeing people like I read the other day that, rent is finally kind of cooperating from a renter's perspective. Rent is kind of flat year over year, which means that wages have slightly outpaced rent. That was. You know, increases in rent was a saga for many years that it was just getting more more expensive to buy or to rent a home or to rent an apartment. But there's been just a ton of supply that's come online by the way of new build apartment buildings, but also you can read into it that some homeowners are choosing to buy a new home and rent out their old home. There's a, there's a increasing number of those. So to keep that three percent interest rate on the on your rental property, spend six and a quarter on your new property. Again, adding to that supply of homes for rent. So that was, think that's a welcome development, especially for inflation numbers for our industry, just for activity. Just thought that was interesting that the, I don't know, the home ownership slash rent market just continues to reshape itself or reinvent itself, right? And it's just different every month when you look at it differently. That ties it up. Anything else, gentlemen, you'd want to cover here this week? James Cahill (17:52) Just looking ahead to next week, we'll have the unemployment report next Friday. And throughout the week, we'll see new home sales and construction spending. So just a little bit of building, sale color, and then leading into unemployment. Jim Glennon (18:12) Very good. Yeah, we'll cover the unemployment report or give kind of a preview to that this coming Monday. Good call there. Yeah, it'll be on the 8th of May. I cannot believe we're already talking about May, but we'll see if, you know, if the employment picture has changed at all due to, you know, inflation from the war. It seems a little bit premature for there to be any effects there, but still the labor market is another that keeps reinventing itself every month. So we'll learn more about that going into next week. All right, gentlemen, as always, great discussion. Thanks for being here and we'll talk again next week. Jim Glennon (18:48) All right, Alex and I have a rare treat for you all today. We've been talking with our friend and our client, Jeremy Shires. Jeremy is the executive vice president and president of mortgage at Westgate Bank, as well as the chairman of the secondary and capital markets committee of the MBA and just a general overall industry advocate that we work with and that does a lot to better our industry. Jeremy's been out there learning, monitoring, and advocating for the mortgage industry. So we thought it would be good to have him on the podcast to school us on some relevant happenings in the government that affect the housing and mortgage industry. So welcome, Jeremy. Thanks for being here today. Jeremey Shiers (19:31) Thank you, gentlemen. I appreciate being on the program. Jim Glennon (19:37) So Alex, why you kick it off? ⁓ You know, we've got a lot of questions for you. We want to kind of prioritize in our brains what we should be paying attention to. Cause you know, you've got the war in Iran, got energy prices, you've got the drama with the Fed, you have an assassination attempt again, but there's a lot of stuff going on that directly affects our industry that we want to at least take some time to focus on. And we want to kind of weed through that, some of that with you to prioritize that for our own education. So go ahead, ahead, Alex. Alex Hebner (20:06) Absolutely. Thank you for being here, Jeremy. know, I'm going to start off with a little appetizer here. It might sound dense to begin with, but I'm just talking about some executive orders that were signed. I believe it was late last month in March in regards to regulatory burden and access to credit. Could you run me through just ⁓ what they're seeking to achieve with these in addition to how on the ground it's looking to be achieved? Jeremey Shiers (20:31) Yeah. So the executive orders are really focused around trying to pave the way to make the home buying and home building process easier in the country. Without the executive order, there are few reasons that the regulatory agencies have that allow them to open rules up for rulemaking and modification. Some of those rules are out there that allow them to make those changes, economic incentive, Paper Reduction Act, some of those things allow them about every 10 years to reopen a rule and look. The executive order allows them to open these up sooner in the process, allows them to get started faster. And it's extremely broad-based. So this impacts The way the executive orders rode impacts everybody from the Securities Exchange Commission to the bank regulatory agencies to the CFPB, kind of all the way up and down the line. Supt nuts, anything that could potentially touch housing or housing finances is kind of lumped into this. Alex Hebner (21:39) You were saying before the call that actually these executive orders and you just hinted at just there. They're extremely broad. Is that correct? Jeremey Shiers (21:47) Right, yeah, the breadth that they have really creates a little bit of a challenge from an advocacy standpoint over. What do we ask for first? So we're trying to pick our spots in what are the things that we're asking the regulatory agencies to touch? What are the things that are going to be the most meaningful and the most impactful while understanding the timelines and time constraints? The rules when it comes to doing these things, they have to go through a proposed rule and then get comment. And then after the comment, they issue a final rule and all that takes time to work through. Sometimes prior to rulemaking, they have to do a request for information. So those RFIs take time. So these things are things that just because the president issued an executive order doesn't mean something changes tomorrow. And in fact, in a meeting I was at a couple of weeks ago, we were talking with some representatives from the CFPB and they were expressing their... Jim Glennon (22:43) Mm-hmm. Jeremey Shiers (22:56) earnest interest in focusing on rules that they could change, that could be impactful, that could be finalized and be durable during the remaining term of this administration. that means that they want things that can withstand the Congressional Review Act. They want the process to be buttoned down so it can withstand lawsuits and potentially alleging violations of the Administrative Procedures Act. You may have heard those be called arbitrary and preaches. So those are things that are very aware of. There's also things that as an industry we have to be aware of if we're going to ask them to make changes. If there are changes made to trade for example, if it impacts the forms, the loan estimate or the closing disclosure. those model forms from a regulatory process take three to five years to get finalized to make changes. So the CFPB was very hesitant to do anything that would make a change to a form because they can't guarantee it can be done in time to be wrapped up during the current administration. Jim Glennon (24:06) So what's the worry there that if it drags on into the next administration that these efforts would just be killed anyway so the two and a half years worth of work would just be kind of useless? Jeremey Shiers (24:17) Right. And to give an example, and we can talk about the fallout from it later. If you recall in the last year of the previous administration, the Biden administration, there was a set of published bank capital rules known as Basel III in-game. Basel III in-game was not going to be friendly to the mortgage market, was not going to be friendly to banks and mortgage. And Jim Glennon (24:38) Mm-hmm. Jeremey Shiers (24:43) It got a big enough backlash from the industry that the regulatory agencies did not quickly push to finalize it. And almost immediately the current administration rolled it back and took it off the table. So carryovers like that can easily be pulled off very quickly, no matter how good or bad we think it is from an industry standpoint to do so. you know, they're really focused on what can they accomplish Jim Glennon (24:52) Mm-hmm. Mm-hmm. Jeremey Shiers (25:13) in the next less than three years to be truly functional about it because they want to these things done in a way that they're durable. Jim Glennon (25:26) Right. So a lot of decision-making to be done and way too many things to accomplish without some heavy discussions around prioritization, right? Because as you said, the executive orders are extremely broad. So CFPB and others really have to pick and choose what they want to focus on. not just because there's so many options, but also because they have to decide on what's going to be durable. actually going to, can they get done and is going to withstand all the reviews through Congress and the chambers. Jeremey Shiers (25:54) Right. Yeah. This is, this thing is broad enough that it is very much like walking up to an all you can eat buffet. And even if I really like a type of pudding, I might skip that in order to take the steak. ⁓ and, and that's really the prioritization that as an industry, we have to help the regulatory agencies identify what's pudding and what's steak. And we may have to understand that we don't have time to eat the steak. We might have to take the chicken. Jim Glennon (26:00) Mm-hmm. Mm-hmm. Right. Great analogy. That definitely is helpful. Yeah, as always, it's one thing to throw an executive order out there. It's another thing to actually have some sort of effect on anything, in this case, our industry. Jeremey Shiers (26:40) Yeah. Alex Hebner (26:40) And let's say that things continue apace. They get through the review process and then these new rules are put into place. What sort of timeline would we be looking at ⁓ in a class half full scenario? Jeremey Shiers (26:54) Glass half if some of the industry groups are able to provide some template model language to some of these regulatory agencies to jumpstart their thought leadership around how to change some of these regs. would get us to propose rules faster. So I wouldn't look for anything to be, to go from a proposed rule and ultimately a final rule until we get into sometime in 2027 when we would start seeing some rules go final, some changes occurring. But as many things as, the president has called for in the executive order to be looked at, I would expect that there's gonna be changes going all the way into they'll focus to try to get those finalized within the first half of 2028. So that way they're more easily can withstand congressional review the election go against the current regulatory agencies as far as who's the party in power in the White House and on the Hill. kind of where I would look at the timeline. You're not gonna see any meaningful changes probably for the rest of 26, but as you get into 27 and into 28, you'll start seeing things come together at pace. Alex Hebner (28:12) Good to know, good to know. No, that's a good timeline, but they need to stick to that timeline, because as you said, once we're into the latter half of 28, could run into some... Yes, yes. Jim Glennon (28:21) election time. Yeah, mean, again, glass half full, just to tie a bow on it with the executive orders. I mean, high level, we're just looking to hopefully see less regulation, right? Less capital requirements, better access to credit. So, I mean, that's what it means to the borrower and to the originator in our industry, right? That's kind of what all these things come together to hopefully provide. Jeremey Shiers (28:47) Right. And ⁓ a number of things that are in the EO that ultimately we believe have the best chances of being durable and being able to be implemented in a fairly short period of time are things that can lower costs to borrowers, families that are trying to buy homes. And while they might not seem like much, individually, ⁓ some of these regulations are death by a thousand paper cuts. You you start stacking one operational thing on top of the next. So things like simplification and changes to the enforcement side of HMDA is an example. You know, there's a lot of originators spend a lot of money to get HMDA compliance correct. And if you've ever Jim Glennon (29:15) Mm-hmm. Jeremey Shiers (29:33) If you've ever been through compliance exam and your HMDA law wasn't accurate, you will gladly spend whatever money is necessary to make it accurate because it's not a fun process. Things around TRIID, tolerance cures, and whether or not we can make sure that... the appropriate parties wind up paying the costs for their transaction. So that way we don't have to charge all families for an oops on somebody's particular transaction. Jim Glennon (30:02) Yeah. Jeremey Shiers (30:05) was not Sometimes you see, and oftentimes you'll see purchase agreements have something buried in an addendum somewhere, and that's usually where some of the biggest tolerance gears come from. And those are just things that are hard to find at the time that you do the disclosures on the initial LE, on that loan estimate. And as an institution, you're stuck with that problem. And so you have to charge everybody else to make it up. that that should be more Some things that could be done in regulation are around ability to repay and the qualified mortgage and should non- government guaranteed loans be allowed to have some level of ability to do a streamlined refinance? Is the fact that you've been making your mortgage payment for the last 36 months on time every time sufficient to say that you have the ability to repay? And therefore we can do a streamline refinance for you without having to re-verify income, re-verify credit and go through the whole process. Potentially. Today, nobody gets to make that decision because the CFPB's ability to repay and QM rules disallow it. So again, that's something that's out there. And maybe if they get time, they'll get to some changes to LO compensation that will allow Jim Glennon (31:17) Mm-hmm. Jeremey Shiers (31:35) law officers to lower their compensation in order to compete on the marketplace. So that way they don't lose a transaction just because, you know, the XYZ lender down the street is offering a little better rate today because rates moved down in the last two weeks. We think that's important to have. It also would allow ⁓ lenders that are currently not participating in first time homebuyer programs to come back into those because so often those first time homebuyer programs are not highly enough compensated for the originator in order to make it make sense for their institution to do because their model just doesn't support that. So we think there's some real possibilities of some good things coming out of the executive order to benefit the whole industry. some folks may be familiar enough with it that the executive order really called out for these regulatory changes to be focused on small originators and small financial institutions, small players in the marketplace. And we actually think that that's a misnomer, that rule changes should be broad-based and should be for the benefit of the entire industry. Otherwise, you wind up running split tech stacks. You wind up with a lot of different costs and expense. The standardization up and down that we have today ⁓ actually is helpful in lowering costs to originate a loan. Jim Glennon (32:49) Mm-hmm. Jeremey Shiers (33:04) and not counter. So having multiple sets of rules is not generally the best way to create efficiency and cost savings. Jim Glennon (33:07) Right. Agreed. That makes sense. I mean, just historically, I think really what we're talking about here is there was a ton of regulation that went into place after the great financial crisis, right? And that was done for a lot of good reasons, but it was kind of very high level, very stiff guardrails. So what we've been dealing with the subsequent 20 plus years, including right now with these executive orders, is trying to put a little more common sense into You could call it loosening or just sort modernizing some of those rules and allowing there to be some flexibility in there. Is that basically the gist of it? Jeremey Shiers (33:51) I would say so. It's lightening it up and loosening it up a little bit make it a little less onerous, have fewer gotchas. That is something from an examination perspective. When you're dealing with these examiners, the regulatory agencies, there's always so many Jim Glennon (33:59) Mm-hmm. Yeah. Jeremey Shiers (34:12) gotchas that are out there and it depends on the, I'll say the jerkness of the examiner, whether they want to pull out the gotcha cards or not. And if they do, there's really not much you can do about it. So that forces us to... Jim Glennon (34:14) Mm-hmm. Yeah. Jeremey Shiers (34:28) act in a way that ultimately increase costs for families to buy homes because we have to charge them more because we're either paying for outside compliance services, we're paying for fee generation engines, we're paying for other services in order to avoid the gotchas. And as an industry, all of that expense gets pushed onto the families that are buying homes. It's just how it works. Jim Glennon (34:55) Has to be. Yeah. The overhead of regulatory compliance since Dodd-Frank has been well documented and is the reason why a lot of, is one of the reasons a lot of mortgage companies didn't make it. Like obviously there was the, the, the putbacks to the bad loans and all that 2007. But then from there, was the regulatory burden was just huge. You had to have inside council. You had to spend thousands of dollars per loan just to remain within those guardrails and survive those. Jeremey Shiers (35:08) Right. Jim Glennon (35:24) those audits. So yeah, makes sense to put some common sense to it now 20 years later. Jeremey Shiers (35:29) Yeah, yeah, it's amazing that we're approaching 20 years post. mean, things started to go bad in 2007 and that really ramped up in 2008 from the financial crisis standpoint. And here we are 18 years later in 2026. Jim Glennon (35:47) something else I want to cover, I want to be sure we get to here is the housing bill, the affordability bill that's been bouncing its way through the chambers, through kind of the typical bureaucracy of our government. There's a Democrat version, there's a Republican version now. I believe the Republican version is in the house kind of stalled in terms of voting. We've talked about it a bit on our webinars. I don't know that we've talked about it much on this podcast, but what is... I don't know, what are some takeaways for this group when paying attention Road to Housing Act? Jeremey Shiers (36:21) Yeah, the 21st century road to housing act right now, the two competing bills that are out there that are the biggest issue is the house has passed a version and the Senate has passed a version, but they are not the same. So without having a full on conference to get those onto the same page, which they haven't done a full on conference. I heard a few weeks ago. Jim Glennon (36:34) Mm-hmm. Jeremey Shiers (36:45) It was like 2010 or 2011 was the last time we had a true full House Senate Conference Committee. So it's like a lot of these people didn't even know how to do that anymore. ⁓ So they have to revise these bills so that way they match. So there's going to be some horse trading between the two chambers to get that done. And from a housing standpoint, Jim Glennon (36:51) Interesting. Mm-hmm. Jeremey Shiers (37:11) There's lots of good that's in these bills, whether it's some provisions for modernizing the rural housing service, know, USC's rural housing ⁓ all kinds of ⁓ cleanup items that are out there that are just good to do and should be done anyway from modernization, updates to... Manufactured housing, significant updates to manufactured housing as far as what's eligible, what's not eligible, removing some of the more dated requirements around fixed chassis and other things that are out there. Some of those provisions are good. It may blur the lines a little bit between manufactured housing or modular housing, and we could do a whole program just probably devoted to the differences between those two products in the marketplace, because they are different. to the casual observer that are the same. But modernizing manufactured housing is going to be good. ⁓ That can be part of how we fix some of these housing issues in the country. Jim Glennon (38:13) Mm-hmm. Jeremey Shiers (38:13) But one of the other things that's in road to housing, this guy get fixed between the two bills, is the Senate bill has a drafting error as it relates to multifamily housing lending limits for the GSEs. And the intent was to change. the lending limits and put on a reasonable escalator so they're like one to four family where every year we wait in November with bated breath for the new limits to come out. Something similar for that to happen for multifamily. The Senate bill has a drafting error and the limit actually would be lower after passage and not higher. And it hasn't been updated since the early 2000s. So that's gotta get fixed between the two bills. Jim Glennon (38:38) Mm-hmm. Indeed. Jeremey Shiers (38:56) The other big one that's in there that the industry has to think through is what's called the institutional investor ban. This is a topic that is pretty hot right now. The president has made discussions and made speeches on wanting to ban institutional investors. I believe he actually signed an executive order stating such. This is a two-sided coin. ⁓ As housing values rise, the thought that you have large institutional investors that are buying homes and ultimately driving home values up further is pretty hard to take, especially if your family tried to get into a home and you can't afford one. banning institutional investors can make a lot of sense in that regard. But the other side has to be considered in this. In the post 2008 crisis, we saw areas of the country, and I'm just proximate enough to Jim in the Front Range in Colorado to have watched this happen, where housing values started to crater. And as they started to crater, what put a floor underneath housing values? Jim Glennon (40:04) Mm-hmm. Jeremey Shiers (40:10) large institutional investors that said these assets are too cheap and we're going to step in and prop the housing market up and buy them. Most all of those homes were turned into rental homes very quickly. And then over a four to five year period, a lot of those institutional investors divested to those properties and they're now in the hands of general homeowners. So while you may like the idea around banning institutional investors to stop Jim Glennon (40:28) Mm-hmm. Jeremey Shiers (40:39) values from skyrocketing, and I think all of us would like to find ways to stop values from skyrocketing, you run the risk of pulling away a piece of market support from the industry should values start to decline. And we never know when we're going to have a market event that creates that housing decline. But should we get a large correction like we had post 2008 without the institutional investors, it could be a problem. would just encourage everybody to kind of think through both sides of the coin before you pick whether you're going to support the institutional investor ban or not support the institutional investor ban because there's broader implications. Jim Glennon (41:24) That's a super important point with that discussion. You know, it cannot be a simple black and white scenario and you've pinpointed exactly why. And it makes me wonder about just a lot of the moves that are being made. We live in this kind of boom and bust economy for better or for worse, right? And we're often addressing one side of that scenario, right? And right now we seem to be doing a lot of things to slow. the appreciation of homes in a market where it's kind of happening on its own. And some of these things are things that will be difficult to take back, an investor, an institutional investor ban, right? Do we find ourselves five years from now in a cratering market saying, man, wish somebody, deep pockets that have more of a tolerance for risk and market exposure would come in and put a floor under some of these houses that are likely to be in some of the more underserved areas. I would imagine that's kind of what happened last time around, right? Jeremey Shiers (42:05) Right. Jim Glennon (42:25) lower cost housing, newer builds, condominiums, this sort of demographic. Meanwhile, we're doing so much to increase supply. Could we put, find ourselves in a situation where we've created another scenario where we have a housing bust? Hard to say, but you make a good argument for why we should be closely considering the long-term impacts of this band versus just saying the pitchforks are out. It's the big banks that are kind of ruining everyone's chances of buying a home right now. Jeremey Shiers (42:56) Yeah. And Jim, I would even say I wouldn't worry about it so much in five years because the institutional investors will have long tenured folks that understand. home, one to four family real estate investments, the risks, the returns, the rewards that go with that in five years. That institutional knowledge will still be there. I get concerned about when you're 18 years from now, like we're 18 years post financial crisis and all of those people that had that experience and would be able to make that call even if there was no ban or not, no longer employed, because they're all retired, they've moved on. It's been years since we've done it. Jim Glennon (43:17) Mm-hmm. Mm-hmm. Mm-hmm. Right. Jeremey Shiers (43:39) Now we can't even play even if we get the green light to do it because we're not sure how do we manage the risks associated with it. How do we actually run this play and make it make sense for the large investors because you've pulled the whole infrastructure out from underneath of it. Correct. Jim Glennon (43:55) It's not an industry anymore. That's, that is, that makes it even more interesting. Jeremey Shiers (44:01) So five years, you could potentially flip that on a dime and still get it back or some form of it back. But if it's 20 years out, it's not coming back. Jim Glennon (44:06) Mm-hmm. Right, by necessity. We've forgotten how to move that muscle. Yeah. Jeremey Shiers (44:17) Right. So, you know, I'm personally very leery about it. I'm not saying no, but I'm definitely not saying yes. ⁓ Jim Glennon (44:28) Right? mean, the home builders are against it. The NBA, I believe is generally against it. Obviously institutions who, you know, buy homes are against But otherwise has a lot of support on, you know, both sides of the aisle and the rest of the bill though, generally bipartisan, right? Generally likely to be, likely to pass at some form here in the coming months. Jeremey Shiers (44:33) Right. Jim Glennon (44:56) very rare situation where there is universal support for the other things that are going on with the bill, such as just general deregulation around certain types of housing, making it easier to and faster to bring affordable homes to market, right? Which is something I think we all believe we've been missing over the last five to 10 years. don't know, optimistic that it comes out one way or the other. Obviously the institutional home buyer ban is that issue. So is, I believe the president has also attached a couple of conditions to signing the bill into law eventually that are around things that have nothing to do with housing, which is kind of always a thing, but I believe they're around election reform is one of the things that may or may not make it into the final bill. I guess. Jeremey Shiers (45:41) Yeah, the president has been pretty firm that he doesn't want to sign anything without the election reform bill and without funding the Department of Homeland Security. you know, even though you've got in the Senate the current version of road to housing in the Senate past 89 to 10, are potential stumbling blocks to getting it done. Jim Glennon (45:52) Right. All right. So yeah, that's one, keep your eyes on the news there, everybody, because something will happen there. And you know, I think this kind of news gets overshadowed by a lot of the geopolitics going on in the world. This is a pretty important one. Long-term, this should be exactly what could be needed for just improvement on the supply side. And so just the lowering of costs, again, for borrowers, just making some of this stuff easier to get done. Alright, what else do we have, Alex? Does that cover us? Alex Hebner (46:36) I wanted to ask Jeremy what stumbling blocks he might see, and I think he answered it perfectly with regards to institutional investors I guess I'll ask the flip of that question, Jeremy. What do you think is the potential to be the most effective, in regards to national housing policy? Yeah, yeah, the game changer. Jim Glennon (46:50) The game changer. Jeremey Shiers (46:54) I think the biggest misnomer in the housing market and in the housing industry is that we can fix a local regional issue with national policy. So lack of housing supply was universal during the pandemic because we had so much demand. We are five years post pandemic or approaching five years post pandemic. And the demand structure shifted and now housing has moved back to more of its historical local regional flare. So you have markets like Austin, have markets like Denver that are maybe approaching overbuilt. You have markets like Omaha that are not, know, the Northeast, they... The Northeast has created so many barriers to building that they're not overbuilt and it is very difficult to become overbuilt there because it's difficult to build a house. So they're not seeing softening in housing values the way some of these markets that are maybe overbuilt are. Florida is starting to become overbuilt as a state. There's still pockets within markets. Jim Glennon (48:09) Mm-hmm. Jeremey Shiers (48:13) So to really think that we're going to fix a local regional problem with national policy is really short-sighted and it doesn't reflect reality. The reality is the national policy changes can make it easier for the local markets to self-help and make it easier for the local markets to flourish because they're not putting artificial limiters on them. But in and of itself, a lot of what we're trying to Jim Glennon (48:33) Mm-hmm. Jeremey Shiers (48:43) with road to housing or housing executive order. secondary things when it comes to creating more supply and creating more homes for families. ⁓ It's really the local, state local, regional is where the rubber meets the road to the most part. And that's where the local lenders, the local real estate agents, the local people, the builder and community have to be engaged with cities, counties, states in order to make the changes necessary to make it make sense for their area. just don't know any other way out of it because it's a local problem that was exacerbated during the pandemic and created a national campaign. Jim Glennon (49:34) Right. Alex Hebner (49:34) Absolutely, no, I like that answer. I like that answer. It won't fix it, potentially, but ⁓ no, thank you. ⁓ Jeremey Shiers (49:40) It can't hurt. It won't fix it, but it won't hurt. Alex Hebner (49:45) Right, right. Jim Glennon (49:45) And it creates the framework, right? Like it's to your point, regulations around building codes is all local, at least at the state level, likely at the municipal, you know, the municipality level. So the way it was explained to me, some of this road to housing bill especially is that the federal government can sort of hand out, hand down a framework to build a neighborhood, for instance. This is how this neighborhood could be built. If you fall within these guidelines, this is kind of, can be universally accepted across the states. you can versus what happens now, which is anytime you want to build a new development, you have to start on square one and you have to take however many months or years it takes to get all the approvals for the type of neighborhood you're building and the sewage, the electric and the building codes. This says, here's just what, if you do it this way, the municipalities had signed off on it. So there needs to be some either nationwide adoption of these codes or There's also been an argument that there could be some incentives handed down by the federal government, whether it's a carrot or a stick, right? Could be, you know, it could be withholding highway money, which has been done in the past to say, if you don't conform to these new codes, then we're going to withhold highway dollars. Or there could be other things where they could say, we're going to subsidize such and such a ⁓ program if you adopt these, these programs just to kind of get, again, get those incentives out there. But to your point, it's just a framework at this point. It needs to be adopted at the state. municipal level. Jeremey Shiers (51:12) Right. And rightly so to an extent from the standpoint of I would expect the energy code and insulation requirements to be extremely different between Grand Forks, North Dakota and Tucson, Arizona. You don't have to build those properties the same way. Jim Glennon (51:28) Florida. Jeremey Shiers (51:37) But there are aspects of those properties that absolutely should be built the same way. you know, it's a lot more nuanced than we necessarily want to give it credit for, because it's an extremely complex to a large degree, it's kind of like a balloon. When you squeeze it, it starts to pop out someplace else. Jim Glennon (51:40) Sure. Mm-hmm. Jeremey Shiers (51:59) you're not exactly sure where you're squeezing all the time. Jim Glennon (52:02) Right? That's a good point. Another good analogy. All right. Well, that's probably as good a point as any to end this on. Jeremy, very much appreciate you being on, sir. This is very informative for me. Hopefully it was for everybody out there. Again, there's a lot of things going on right now on the Capitol Hill that affect our industry. And not all of them are getting a ton of press, but they all are super important. And it feels like there's I don't know, kind of a deluge of of decisions that will be made here in the coming months that are going to affect us for years to come. So thanks for educating us on that and having this discussion. Jeremey Shiers (52:39) No, I appreciate the invitation and you guys giving me a little bit of a platform to talk a little bit about a few things that I've got my eyes on these days. Jim Glennon (52:50) Very good, very good. Glad we could help each other out and have this open kind of candid discussion. So we'll do it again soon. yeah, again, thanks Jeremy for the wisdom. Thanks Alex. Take care gentlemen. Alex Hebner (52:52) time. Thanks Jeremy. Jim Glennon (53:04) All right, let's close this thing out. Thanks so much, James, Alex, and Jeremy. That's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.

Jim Glennon (00:00) Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Welcome everybody. Thanks for being here today. We've got a great show as always in the interest of making sure you know what to watch, whether you're an originator, capital markets person, or just someone interested in the mortgage industry and some great market commentary. Here we are. We'll start out as always with a market update with the crew. We'll have Kevin with us today as well, but of course we'll have James and Alex. And then from there, we will move on to a quick discussion about some underappreciated economic numbers. We were kind of talking on the side about some numbers we were seeing recently that we thought were interesting indicators that don't get a lot of press. So we thought we'd share those with you. Before we get into any of that in the way of data, OBMMI, the 30 year Conventional 30 year fixed is at 6.18. So seeing the spread between treasuries and mortgages continue to contract a little bit, which is a good thing to see the 10 year still around four and a quarter still a bit stubbornly high there, but not breaking out. Not breaking out to the higher side, which is a very good sign. I think there was some worry. Certainly we were worried about it and other market watchers were worried at the beginning of the war that we'd be potentially seeing. know, prolonged six and a half rates with mortgages maybe higher, six, seven, five, seven percent. But there hasn't been a lot of ⁓ buying in bonds, but there also hasn't been a ton of selling. So keeping our fingers crossed there. All right. Let's go check in with the crew and see what's going on in the market. Jim Glennon (02:02) All right, welcome. Welcome. We have a slightly oversized team here today to talk about what's going on in the war and the economy. We've got, as always, Alex and James. We've got Kevin with us as well. It's been a minute, Kevin. Welcome. Welcome, everybody. Kevin Foley (02:18) to be here. Alex Hebner (02:19) Morning. Jim Glennon (02:21) Good morning. So where to start today? Obviously it's, we're kind of in Groundhog Day, at least I am with this war. Is the straight open? Is the straight closed? Is the war over? Is there a ceasefire or not? It depends on who you ask. Kevin Foley (02:38) We need like one website where we can just go and check this. Is the Strait of Hormuz open? Yes or no? Jim Glennon (02:46) Who gets to populate it. It'll be like Wikipedia, right? Are people will keep going on there and changing the answer depending on whether it's, you know, someone in a bunker in Iran or that's the headlines that are really dominating what's going on in the market right now. Doesn't it? Doesn't it seem we were talking before I hit record just about how. I mean, I think we're somewhat lucky where we've been insulated from. Kevin Foley (02:52) That's a challenge for sure. Jim Glennon (03:08) a lot of the violence of this war, at least in our part of the world and in the West. military has been relatively safe, but there have been casualties. But it doesn't feel like the market. think what you were saying, Kevin, is there's been some articles written recently that the market isn't pricing in risk. the equity markets are a risk instrument. I mean, to clarify, think they're not building in risk that the war could boil over or there could be. Kevin Foley (03:30) Yeah. Jim Glennon (03:36) Hostages taken or there some risk of the war could go south on us worse than it has already So each day whether it kind of talks are good talks are bad Stock market is still good. It's continuing to hit records Which that seems counter intuitive when there's a when we're we've got ourselves entrenched in a war that seems to be stretching out Kevin Foley (03:56) Yeah, you would think so. think a lot of folks might expect there to be more volatility or disruption to the downside than what we've seen over the last couple months. of that, think where folks are more worried about is what happens to all the missing oil that has not entered or gone through the straight of four moves over the last two months. Where does that end up showing up in the broader economy? And then the uncertainty from here forward of, this something that will just wrap somehow in the next short period of time, whatever that is, or is this something that's going to drag on? Is it going to get worse before it gets better? A lot of those things we don't really know, a lot of market participants feel more confident or more optimistic about where those are going, particularly folks in the equity markets. the bond market has not recovered to where it was when the war started with the 10-year treasury being below 4%. It's still been fairly consistently above you mentioned there was an interesting article that was published over the weekend by economist Kyle Scanlon, article, it's in the New York Times the title of something like why the stock market doesn't make any sense. And one of the major underlying feces is that markets are just simply not pricing in level of risk that most analysts might find adequate because of the idea of, it's called the Trump put or maybe less charitably referred to as the Trump taco. argument with when you have state responding in the way that it has to how the markets are doing, basically setting policy kind of within these set of within the market. You have your up and your down throttle. When the stock market goes up, that gives you more leverage to potentially make policy decisions that are damaging to the economy. When the market goes down, opposite happens where you need to take more conservative ⁓ policy stances relative to their market impact. I think the challenge is, what happens with that is markets start to expect more from the state and a lot of the risk that would naturally be occurring within the markets gets offloaded to the state to manage. then you find situations where the straight-up form loses close. There's 10 million plus barrels of oil every day. And you have the stock market at all time highs. some of those things might be counterintuitive. And some folks might just say, well, this is all, it's not a big deal. These are small affairs or they're all going to resolve themselves. And that's true. But or that might be true, the reality is if these were easy things to solve, there's an argument to be made that this could have been over already as well. So the lingering risk that we have within the again, perceived to be not really a matter for market participants, but more a matter of the state to come in and resolve eventually. So that's kind why we were Jim Glennon (07:20) Mm-hmm. Kevin Foley (07:23) You know one perspective at least on why we're seeing a lot of the know Uniqueness in the market that we've been seeing over the past a couple of months So I thought it was a very interesting article. I would encourage folks to go check it out feel like it helped me make more sense of what's going on for sure Jim Glennon (07:38) Yeah, I mean, we see it with a lot of things in the market now and it's, it's, it does feel like we're complacent, maybe too complacent right now. And a lot of times, because not only have the last kind of six weeks of this war, I think made people complacent because of the taco trade, right? Which means by the way, talk Trump always chickens out. There's this thought that Trump won't let the war get out of hand that the state won't let the war get out of hand. And if there are economic ramifications, those will be taken care of as well. And those, That complacency goes all the way back at least till the great financial crisis, certainly during COVID, where things got scary bad for like a day and then the government jumps in and helps out. Right. I think, you know, to paraphrase part of what you're saying is we're not pricing in the possibility that things could get out of hand or Trump could allow ceasefire to lapse or could start bombing the infrastructure of Iran and really cause like a world war three. We're not letting that come into the trade. So we're seeing record highs as if the war is not happening or the war will end and it will be better off for it financially. Kevin Foley (08:42) Right. Yeah. And I think you bring up a good point. The article also makes this point, which is this idea of the Trump put or the taco is not really a new phenomenon, but it's something that has become a bigger presence within the market over the last several decades. We saw the same thing during COVID where the federal government came in that was a more extreme scenario where we really didn't know what was going to happen. the federal government stepped in to obviously smooth things over economically. We saw it during the 2008 financial crisis. We saw it during the 2010s with QE and, you know, all the new unique things that the Fed was doing to to transfer economic growth. So but it does seem like there has been this, you know, subtle but increasing to the point where it's now kind of in your face, federal intervention in the markets, helping a floor on asset prices ultimately, now the market has come to more expect or rely upon. obviously there are times when there are limits to what the federal government can actually do. so how is that risk ⁓ being priced in? Is that risk being priced in? I think those are things that we don't have a great handle on at the moment. Jim Glennon (10:07) Right. Well, what can we do, but keep the blinders on and follow the money, I suppose. And then the money says that the straight is less open today than it was on Friday. I would say if you were to follow the money, follow the stock market, set risk aside. ⁓ what else did we see last week? Speaking of Alex, I think he wrote a couple of things down, like, meanwhile, like the world still turns economy, still moving. We had some numbers last week. We talked a little bit about inflation on the podcast last week. What did we get? after the pod in the way of data. Alex Hebner (10:39) Yeah, yeah. When we recorded last week, were waiting on PPI and it came in much the same as our CPI number showed hot as we were expecting. And again, I think this is something that, you know, to go back to what Kevin's saying, you know, the market was expecting this and it really, it shook it off immediately. PPI jumped for the non-core number, which is inclusive of energy prices, jumped half a percent month over month, which landed it for the year around 4%. Jim Glennon (10:56) Mm-hmm. Alex Hebner (11:08) You know, these numbers, PPI was jumping here and there above 3%, but to see it jump to 4 definitely indicative of the crisis we have going on the other side of the planet right again, PPI is generally a leading number. Keep in mind, you know, these are, these are these input prices before that, that producers are seeing before you see that product on the shelves. So it could be indicative of a steep increases in CPI for the April release. We'll, we'll have to see on that. Jim Glennon (11:16) big. Alex Hebner (11:35) That was the standout for me last week. was relatively quiet on the data front otherwise. Jim Glennon (11:40) Yeah. Good call. like you said, numbers came in, expectedly hot and we kind of shrugged it off. we getting any decent, decent data this week? Alex Hebner (11:48) Yeah, that's right. Yeah, yeah, we'll get a PC to cap off all of our inflation metrics and there will be an FOMC decision on, I believe next week. Jim Glennon (12:03) Yeah, I think it's the 30th is fed meeting. expectations, regardless of what happens with PC this week, right? I would think flat rates don't move. Once again, the fed is going to wait and see what the real effects are of the war inflation, unemployment. Alex Hebner (12:23) Correct, yeah, sorry, PC is next week along with FOMC meeting. This is a pretty quiet week. Jim Glennon (12:30) Gotcha. All right. So I don't know. have a couple of things on my mind, probably on listeners minds as well. Maybe we start with James and go around the room. What's the biggest risk to interest rates right now, especially mortgages? James Cahill (12:46) Outside of the war, I'll leave that to someone else. I think it's still on the discussion around Powell, right? So Powell is coming up his final official day is ⁓ during the month of May. And he said, Hey, I'm staying, right? I'm not stepping away anytime soon. Warsh has confirmed. And Tom Tillis is still holding up the Senate Banking Committee and he is a lame duck. He's not running again. So he doesn't have to do anything that anyone wants him to. He can be as ineffective or effective as he wants. And he has until January. So he could hold this. The question is really, can the administration and Donald Trump just fire Powell, tell him to leave? traditionally this role people previously have. Jim Glennon (13:07) Mm-hmm. James Cahill (13:35) They haven't had a following. They haven't had someone confirmed. So whoever is the head of the Fed stays on. We've never had a situation where the president says, well, no, you don't. So it becomes kind of an awkward situation where there's no rule saying who's in charge. You'd think the administration is, but the Fed tends to be independent. It's going to be a discussion. It's going to be in the news. It's going to cause discomfort with Fed independence. And that is a threat to rates. So I think that's going to be the biggest thing moving forward. Jim Glennon (13:45) Mm-hmm. Mm-hmm. That's a big one. It's been the case for especially the last couple of years, the threat of the independence, but now you've got this unprecedented event of an expiring tenure along with Tillis dying on the Hill of, you know, I won't confirm anybody until criminal charges are dropped against Jerome Powell and others in the FOMC. I don't know. What do you think Alex, setting that one aside, the war? Well, I mean, you could use the war. James passed on that. What's the biggest risk to interest rates right now? Alex Hebner (14:37) I was going to jump as kind of a second order effect to the war and tying back into Kevin's conversation from earlier. I'm going to say biggest threat and maybe not as on the horizon as pal and what James was talking about here, but I'm going to say finding the limits state intervention. As we've said, it got us out of the great financial crisis, blunted the impacts there. COVID, know, threw everything at the wall, massive programs, but these all came at a know, these conversations have been happening for decades. There's been, you know, going back to, you know, Rand Paul in the eighties has been talking about the federal deficit and the issues with it. But, know, debt GDP for the U.S. now is approaching 140%. You know, the interest payments are massive. And I do think at a certain point, Jim Glennon (15:16) Mm-hmm. Alex Hebner (15:26) there comes to be a limit to what we can do to blunt the effects of a crisis. I don't know what that crisis could be. fact, I don't probably think it'll be this war with Iran, I do just want to call out the limits to that federal intervention and then a crisis that can spiral from there because we're not able to blunt the impacts of it. Jim Glennon (15:44) Right. Cause we're finally broke. Yeah. I, I, I share yours. I, I worry about the debt, our nation's debt, just the supply of debt that's out there and going to be out there between us and the rest of the world, including, especially NATO with, you that budget looking to double itself by the order of trillions of dollars over the next decade. And then whatever we're doing over here, which we have not yet turned the corner of reducing. Alex Hebner (16:12) Yeah. Yeah. So broadly speaking, I'd say it's the inflationary effects of the federal backstop. Jim Glennon (16:13) the deficit we just seem to keep increasing it. Yeah. And what do we do if we actually have to step in again? How much ammo do we have? If any. How about you, Kevin? Biggest risk to interest rates. Toughest one is going last, I think. Kevin Foley (16:28) Yeah, well, Well, I was going to say you guys are giving me the easy one. I'll take I'll take the effects of the war because I have something that I've been thinking a lot about lately and mostly you know, when you have an energy shock like what we've seen and relatively speaking, think like oil prices have not been it hasn't been worst case scenario yet. You know, I think been flirting with $150 barrel dated ⁓ oil, means like current spot price for buying oil in the physical market what we see if we go to CNBC or whatever is typically the futures, which can be different if you're actually trying to physically buy oil versus just trading the paper price. given how quickly that spiked and the impact in other areas, helium, petrochemicals, It's not simply just oil, fertilizer. There's a potential of the effects of the war already to seep its way into the global economy over the coming months in a way that is net negative. This is not to say necessarily that the sky is falling, but that over the course of 2026, potentially into next year, you could continue to see prices of of goods that the world economy highly relies on being higher than they were year to a fairly substantial degree. There's already been reports of fertilizer increased by about 40 % for this year's growing season, which makes its way into food prices later in the year during harvest. Helium is necessary and related to chips, magnets, for medical devices. Yeah, medical devices. was what I was looking for there. Petrochemicals necessarily in plastics. So all of those things I think are items to watch for their inflationary pressures later this year, including food. There's some indications that the US relatively speaking could be somewhat more isolated from some of the worst effects compared to Asia where Jim Glennon (18:20) Medical equipment, it's a... Kevin Foley (18:47) They've had the steepest drop in actual physical oil, but I would definitely want to be keeping an eye on that. feel like that's just something that was not really going to be a factor this year. And now you're going to need to keep a close eye on it to see how that might factor ultimately downstream into inflation, supply chain bottlenecks, a lot of the same things that we saw post COVID, potentially not necessarily to that level. Yeah, I'm going to be keeping a close eye on those things for sure the second half of the year. Jim Glennon (19:20) All right. So they have the inflationary effects of the policy and of the war. The two do overlap, but there's also, there's a lot there. And, know, I'm not saying this is what's going on. It's certainly not the viewpoint of optimal blue. But some people think you fight wars over resources so that your country is less affected by these inflationary pressures that are building and probably going to build over the next decades, right? Wars make money. Again, follow the money. Kevin Foley (19:47) one more anecdote on that. know, there's some research, you talk about, you know, food and inflation and, natural resources. know, anecdotally, when we had the, you know, the Arab Spring back in 2011, that was, you know, a situation where, you know, having across a variety of countries, there was sort of civil, social unrest. that unfolded all kind of around the same time everywhere from Tunisia, into Libya and Syria. actually happened the year before that in 2010 was there were a series of major forest fires that happened in Russia in the area where you had, it's like the bread basket of Central Asia, ton of wheat, of other crops that were severely impacted by this extreme heat and forest fires that are happening during that time. And there was some research that has actually connected those two activities where there were shortages or inflationary pressures in those areas where a lot of that wheat and other crops come from Russia. So you start to think about first order, second order, third order effects of these sort of global macro events, it becomes very unpredictable downstream. that kind of ties into your point about resources and why to secure resources and using conflict as a means to do so, but just also kind of tying back to what I was saying, I think there's a lot of things to watch for sure, into the second half of the year and then ultimately to next year. Jim Glennon (21:09) Mm-hmm. Kevin Foley (21:27) know, downstream from the effects of this war. Jim Glennon (21:30) Yeah, I think it will be very interesting that when, hopefully when this war concludes, see how that part of the world is put back together. Right? That's going to be very different, I think. And what we have access to, what other nations have access to in the free flow of resources or the actual capturing of resources, I think it'll be interesting to try to follow that from this side of the world. All right, let's move on to the next segment. Jim Glennon (21:58) pretty cautiously excited about this next kind of short segment we're throwing in here. We've got Kevin with us. So we were thinking about kind of, you know, some things that revolve around Kevin's world, not just at OB, but just some things he's interested in. So I thought we could ask him a couple of questions on something that just came up in conversation last week, which was there's so many economic indicators out there. There's There's a handful that we all focus on very closely that the media covers, things like unemployment rate and lately inflation numbers over the past five, 10 years, GDP to a medium extent. And then there's hundreds of others, but are there any sleepers out there? there some underappreciated economic indicators that maybe one could... add to the widget on their phone or that they should be paying closer attention to just to really know what's going on either with the economy or to be able to have some view into what maybe economists and analysts are looking at when they look at investing or interest rates. Kevin Foley (23:04) Yeah, so I'm a huge market econ nerd and I love looking at charts. of the more underappreciated apps, in my opinion, is actually an app distributed by the Atlanta Fed, and it's called Economy Now. And it has a number of metrics, just recent metrics think all kind of tie back to the 10-year treasury yield. You know, things like unemployment, has inflation metrics. one in particular that I tend to frequently look at there is business inflation expectations. And I relied on this pretty heavily last year as a metric to help me understand how tariffs and their effects be seeping its way into actual inflation data into the markets. So business inflation expectations, it's a 12 month outlook. And survey around 600 or so business leaders each month and then publish those business leaders' expectations for inflation over the next 12 months. Now, inflation, we can calculate break even inflation rates over the same 12 month period. So market implied inflation. Alex Hebner (24:12) Thank Kevin Foley (24:24) But business inflation expectations might differ from that. both data points I think are helpful because you have, you know, market participants who are out there trading, looking at what market's expectation for inflation is going to be. But then you also have business leaders who are running their own business. They need to be thinking about things like payroll, the price of ⁓ goods, supply chains, things like that. And that's just a different perspective. Business inflation expectations pretty much throughout all last year stayed very steady. So there was not much of an impact of tariffs showing up in those business inflation expectations, which as time went on kind of had me feeling more confident that we weren't ultimately going to see a sustained rate of increase in prices that the effects of tariffs might be more of kind of like a one time thing. That's something that I've gone back to pretty frequently. Also, so far this year with the war happening, business inflation expectations still staying fairly low, right around 2%. So overall, I think that's good news, given where we are so far this point in the year. But that's definitely one of my top underappreciated market stats that I go and check frequently. Jim Glennon (25:40) I like that, that one. I can't tell if it's just wishful thinking or if there's really this, this deeper understanding across the business world, the producer world that, that tariffs somehow weren't going to do it. They weren't going to cause rampant inflation, which they ended up not doing, even though classic economists would tell you otherwise. then now with the war, you know, should it, should a war cause inflation or is that more of a short-term tempered? Expectations can be important, Consumer sentiment tends to lead us to some assumptions about consumer spending, even though they're not usually right, at least lately. So something like this makes a lot of sense that we would look to see what is sort of the mood within these businesses. If they're expecting inflation, obviously they're going to raise prices, right? That's going to be part of their strategy is to get ahead of that. So that's something I would want to know. Kevin Foley (26:32) Yep. Yeah, for sure. you know, inflation at the end of the day comes down to it's not something that's centralized. It's something that's decentralized comes down to a million different decisions all across our economy around, what is the price that we pay for for goods or services versus what is the price that we feel that we need to raise our, you know, our the price of our employees. know, salaries, you things like that. you know, it's also one of those things that when it when there is sort of a self-awareness of inflation, that also changes the dynamic as know, when we think that we're in a or we're entering an inflationary environment that we also need to make different decisions as business leaders. So, yeah, it's super interesting stat overall. Jim Glennon (26:59) Sure. Sure. Yeah. All right. So that's a good one to start. Maybe one or two more. What else you got? Kevin Foley (27:29) so another big one that a, have been checking pretty frequently. It's a newer one for me. it's something I've talked about here before and it's the, the churn, unemployment, the current it's like a, now cast of unemployment. and it's published by the Chicago fed so in the Chicago fed run by Austin Gulsby, you know, also fairly, fairly active online. lots of commentary out there, but they created this real time unemployment cast that looks at, you know, ⁓ vectors of hiring and job attrition and all the way down to like scanning Google searches, scanning, know, employment postings. and putting together kind of a real time composite metric for what the unemployment rate is. And it was released right as the government was shutting down right at the end of Q3, right at the end of September last year. And it was a great thing to have when we weren't getting that updated BLS data for unemployment. it's, know, while especially since there have been shutdowns and there have been disruptions, know, delays and getting data out, It's been a great opportunity just to be able to have a real time view. And you can go and you can check in any time. It gets updated on a weekly basis and gives projections for where we think the next month's unemployment rate is gonna land. the good news there is the unemployment rate has been fairly stable. It was up to four, 4.5 and kind of back down to 4.3. hasn't been a significant deterioration in the labor market. That's also put a little bit of a floor on the 10-year treasury because there was some concern around going into 2026 where we're going to see a softening labor market continuing to soften beyond 4.5 % unemployment. So far, that hasn't been the case, but definitely another good one for me keep an eye on. know, in between months, try to get a sense of where things might be trending for the next BLS report. Jim Glennon (29:48) Good one. Yeah. You would think with, with AI now there'd be more opportunities to take different inputs and try to kind of back into your own number for a lot of these, these prints and not having to wait for things like surveys and things that could have a larger level of error in them. There's actually more tangible data that you could drive. I like, I've got one that I'll throw in there. I actually, I got this one from Logan Motoshami of housing wire, but it's a residential construction jobs. So you reminded me of that. talking unemployment. It's, one of those, another one where within businesses, there's a lot of kind of innate knowledge about which way the wind's blowing. Right. and a lot of times construction, especially residential construction, maybe one of the first things that's going to see, it's going to take the pain if there's a slowdown in, in spending or rates go up or there's a slowdown in GDP. So that number, I've been following it for the last couple of years now. And it started, it took a bit of a beating last year in the summer. Kevin Foley (30:27) Yep. Jim Glennon (30:45) But then it's bounced back to almost as high as it's ever been. it's, you know, feels like a pretty good indicator of the health of the job market, even with a little bit of noise around some of the current administration's policies on immigration. I think that that caused definitely some noise in it last year. I think it's still a really good indicator of, of, of the jobs market. Kevin Foley (31:06) Yeah. that's, I love that one too. residential construction actually peaked in 2006. So while, you know, we're still kind of, Well, while, you know, the stock market was, you know, continuing to go up, you know, that was like one of the first early signals for, you know, the housing market to ultimately turn. Jim Glennon (31:07) Let's see, Alex, you have Yeah, I'd buy that. A lot of things speak to 2006. Kevin Foley (31:33) So, yeah, definitely agree with you on that one. Alex Hebner (31:35) I definitely like Kevin, that all of your, ⁓ all your data points are those with skin in the game, you know, you know, business leaders and, you know, looking at them for their inflation expectations rather than, you know, maybe calling the random consumer who maybe doesn't buy that, that basket of goods that we're looking at when it comes to inflation. Same for residential construction. These are people with skin in the game. These are people making hiring decisions. I think that's always a good delimitator on what separates a good data point from a great data point. But with such a dearth of information out there, Kevin, is there any that you just throw straight in the trash? Kevin Foley (32:15) ⁓ But basically whatever the S &P is doing during the war, mean? No, just kidding. ⁓ No, there are some. So I actually have a theory related to one economic data point where I just, you know, every year it comes around and I throw it right out the window. And that's Q1 GDP. And so here's my sort of like semi conspiracy theory around Q1 GDP. So Alex Hebner (32:21) Yeah Kevin Foley (32:44) course, GDP is an insanely important data point. Don't get me wrong. This is one of the most crucial opportunities for us to get a sense of what's going on in the economy. There's so much data that gets published alongside of But in Q1, we see sometimes the most volatility. If you look back over the past 15 years or so, Q1 GDP consistently out or underperformed the rest of the months calendar quarter. And the reason that I believe this happens is because when we're publishing Q1 GDP numbers, we do account for seasonality. But the big but is that we don't account for what the season was actually like or what the weather actually was during Q1. So Q1, obviously wintertime during North America. Sometimes we have very severe winters. In the Northeast, we had a fairly severe winter this year. Out West, it was bright and sunny and warm and lots of places really unaffected by winter weather. But when we calculate our GDP numbers and we account for seasonality, we don't actually take into account what was the weather like. Jim Glennon (33:48) Mm-hmm. Kevin Foley (34:04) how might that have actually disrupted economic activity or not obstructed economic activity? And so since that's not actually an input, what we have is really just like a smooth curve that's sort of averaged over the past several years. But if you have a winter that wasn't like one of the past several years, well, this is why I think often we see an underperformance of our QNGDP number relative to the other quarters of the year. That's something that I've picked up. pounding the table on that until the BLS hears me I can speak to their manager and ultimately get this situation corrected on good terms. So that's my metric that I'm going to typically throw right out the window every year. Alex Hebner (34:52) Understandable. Maybe they need to start smoothing by which weather pattern we're experiencing that year. We La Nina, La Nina is yours. Kevin Foley (34:58) Yeah, know, plug right into you. You the National Weather Service right there. You could just plug right into their APIs, I'm sure, and start to start to better understand what's going on there. But but you know, they haven't answered my phone call so far, so. Alex Hebner (35:03) you Fair enough. ⁓ Jim Glennon (35:16) Okay, well there you have it, Kevin's underappreciated economic indicators along with one that you can throw away. So we're moving to, we're going to need to move to some sort of trimester system, I suppose, because you throw away the first quarter every single year and just focus on the other three. And then, ⁓ yeah, some cool other things to kind of check out, including an app you can get that's hosted by the Atlanta Fed. All right. Thanks a lot, Kevin. Thanks Alex. Great conversation. Alex Hebner (35:42) Thanks Kevin. Kevin Foley (35:44) Awesome, thanks for having me guys. Jim Glennon (35:45) Okay, let's wrap this thing up. Thank you so much, Alex, James, and of course, Kevin. That's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning in to Optimal Insights.

Jim Glennon (00:00) Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Hey, welcome everybody. Thanks for being here almost halfway through April. Feels a little bit weird, but here we go. got a great show. for you today, as always, in the interest of making sure you know what to watch out for, whether you're an originator, a capital markets person, or just someone interested in the mortgage industry and some great market commentary. We'll get into it here in a second. So we'll start with Alex and I will have a little market update, a lot to discuss there, obviously, some changes over the weekend with our stance on the war and general geopolitical pressure. A lot of numbers. Came out last week, you got some numbers this week, a lot of Fed speak, just a lot of interesting components driving the market right now. And then after that, Alex and I will have fellow trader from our desk, Karim Maaliki on the podcast to talk through what we do each and every day on our desk. It's been a while since we've done that. We'll generally have a conversation around the subject of hedging. So kind of a hedging 101, if you will. We'll keep it very high level. So don't be discouraged or worry about us getting too technical. We'll just have a good discussion about what hedging is in the mortgage industry, but also what it looks like in other industries as well to kind of draw some parallels to things like that. Maybe the airline industry right now, where there's obvious gyrations and things like fuel prices. we'll also just talk about many of the other things that we do to serve our clients every day. Before we get into either of those things, just very high level data, the OBMMI conventional 30 year tempered a little bit late last week. We're down to almost six and a quarter. So starting to shave some points off, interest rates for 30 year mortgages, the 10 year 4.33. So a little bit of relief there as well. Still about a two point spread between treasuries and mortgages. So we're hoping we get some kind of traction this week, some sort of progress in resolving this conflict in the Middle East that should send rates lower. But for now, I think six and a quarter is probably going to be a bit of a floor for what we're seeing. So let's check in with Alex. generally check in on what's going on in the market. Jim Glennon (02:40) Okay. As usual, Alex and I were kind of chatting on the side. We decided to just hit the record button. Just a ton happened over the weekend. We got some pretty good data last week. We were generally talking through the high level concepts here of what should we be focused on as capital markets experts, originators, folks that are, anybody who's just interested in what interest rates are doing, especially in the mortgage industry. Where do we start, Alex? What did we see in the way of data last week that we care about? mean, had inflation, that's probably the biggest one, wouldn't you say, just in terms of regularly scheduled data? Alex Hebner (03:13) Yeah. Yeah, in terms of regular scheduled data, last week we got both PCE and CPI, PCE being that preferred metric for the Fed's inflation readings. Both were elevated off of last release. Both touched 3 % on their non-core numbers, which it's really isn't surprising. I think the market saw elevated readings for March coming down the pipeline with the events that have been transpiring in the Middle East. Jim Glennon (03:27) Mm-hmm. Alex Hebner (03:43) Both showed real big pops in energy, no surprise there. just gonna be a matter of how long are these releases going to be in place? It all comes back to the geopolitics. If 20 % of the world's oil is shut off, that's gonna result in higher prices. Jim Glennon (04:06) Yeah, it's crazy how quickly it kicks in, but it makes sense, right? As we've said, fuel kind of affects the price of everything. And especially the perception that fuel is going to be more expensive in the future makes it that much worse. was reading about jet fuel prices just in preparation for the segment that we're going to have coming up here in a moment. even with good hedging of fuel, of oil prices, Fuel has gone up a lot quicker than even oil has in terms of price. And some of that is just speculation of what's the, know, how are these fuel companies going to maintain their margins when there's volatility in oil prices and a lot of unknowns, particularly when this conflict will end and how it will end and how quickly tankers will be again, let through the straight. So they basically just jacked their prices up and wait and find out, right? Airlines don't have much of a choice. They have to buy fuel. They've already sold tickets. They have to fly around the world, right? So just. Just freaking havoc is this conflict in the Middle East. Alex Hebner (05:07) Yeah, definitely. There could be second order effects, I think, as we will talk about later. Airlines often hedge their fuel costs months ahead of time using futures contracts. So they're able to lock in the price of fuel a little bit ahead of time. But as those contracts expire and the airlines have to go back out into the market, yeah, they're going to be seeing sharply steeper, more expensive fuel probably in the mid summer, late summer. Jim Glennon (05:30) Right. Meanwhile, as you said, the consumer is paying higher and higher prices for everything. And that is anticipated to remain that way for a while. There's also the consumer confidence and sentiment type numbers have been coming out and those are lower than they've ever been. I mean, as you pointed out earlier, for the last year or so, they've kind of been in the toilet, but this last number was really poor. And that likely had everything to do with the conflict in the Middle East and how. felt like we were right there, of soft landing, low unemployment. We had inflation down in the kind of mid to low twos is starting to feel pretty good. Now we're uncomfortably high again with inflation. The jobs numbers have yet to crack somehow. They seem to be defying gravity, but the consumer is not in a good place headwise in terms of their opinion on what's going on in the economy. Yet we keep spending. Somehow that doesn't show up in the actual numbers. But as you pointed out too, some of this is the K-shaped economy or the K-shaped recovery, if you will, where I think you said it was like 10 % of the top income earners are the folks doing a lot of the spending right now. I'm kind of propping spending part of our economy, which is essentially 60 % of GDP. Does that mouth jive about right? Alex Hebner (06:52) Yeah, that's correct. Yeah, we've seen an emerging trend over the past year. It's always kind of been the case, but especially so in the post-COVID world that the well-to-do's have been carrying the brunt of consumer spending. as you said, know, sentiment's been really bad spending has been pretty poor out of, ⁓ you know, the rest of the economy. but it's able to be propped up by these high income earners and those that are pretty asset rich and feeling rich, you know, looking at their bank statements and their portfolios. But you know, the price of gasoline is something just about every single American feels. It determines election cycles. You we are in election year. And so yeah, pain at the pump is probably even more so a pain point than inflation is at the moment. Jim Glennon (07:36) Right? Yeah. It's like, if you look at the very high headline number, spending looks fine. But then if you dig just one level deeper into certain types of restaurants, stores, just certain types of purchases that different demographics tend to make, you can kind of pretty well tease out who's actually spending money versus folks who are really seeing, really getting pinched, whether it's at the pump or at the Applebee's or whatever your preference is to the... to look at, you start measuring fast food versus casual dining versus upscale, and you can see it there too. So not a light at the end of the tunnel yet in terms of consumer sentiment or inflation and same with interest rates, right? Just to tie this back every time we get another escalation in the war or we don't, or we get more uncertainty like we saw over the weekend with the, you know, we're now implementing our own blockade on the Strait of Hormuz in response to the Iranians essentially blocking the straight. Fuel goes up again. Interest rates go up again, although pretty flat today. We didn't see any kind of, I don't know. We're not seeing really any major moves in either market, which seems a little bit, almost like the market's paralyzed at this point. Maybe it doesn't know which direction we're going. Alex Hebner (08:54) Yeah, the headlines I've read are that investors are quote unquote, looking through this recognizing that there will be some resolution at a certain point, elevated fuel costs, as we've talked about, will be a factor to consider in the 12 to 24 month forecast. if you're looking at a longer time horizon, investors are deeply discounting this conflict at this point in time. And yeah, I'm sure you mentioned it in the opening, but the 10 year is that. know, 4-3 today, was right around there on Friday as well, before the peace talks that completely fell through over the weekend. Jim Glennon (09:29) Yeah, OBMMI, same kind of thing. We're about 6.3, six and a quarter, feels like our floor right now until we get some kind of follow through on some of these resolutions or peace talks. Alex Hebner (09:43) Yep, yep, definitely. Jim Glennon (09:45) All right. For the rest of this week then, as far as what might affect markets outside of some kind of development in the conflict, what are we looking at in terms of numbers or Fed speak? Alex Hebner (09:58) We'll get PPI on Tuesday, the final inflation reading for the month, that producer price index, what the inputs are looking like. It could shine some light on energy costs more so than what we're getting out of consumers, just because I think it'll bleed through much more so as an input. When we're talking about inflation, oftentimes we exclude the cost of energy when it's fuel costs for the average consumer. But again, we utilize fuel as we keep saying for everything, transportation, and as an input into many products. So I think it'll be an interesting release there. But other than that, it's mainly just a lot of fed speakers. ⁓ Just keep an eye on pivots in their terminology and how they're thinking about things. But right now, broadly speaking, we're looking at a pretty hawkish Fed. I'm interested to see what would Myron, our most dovish prior to the Iran conflict, how he's thinking about things. But I really don't see a path forward for rate cuts at this juncture. You can print money, but you can't print oil. Jim Glennon (11:00) Yeah, agreed. It feels like the stance of the Fed is unlikely to change until there is some sort of resolution of the conflict. Prices are up as expected. So we're back to expecting flat rates this year, even rate hikes versus cuts. It would be interesting to hear what Myron has to say, given his previous rhetoric that we should be a point or two lower than we are now on the Fed funds. I don't know, weird to think about where we would be. In terms of inflation or growth, had we made cuts like that over a year ago when the White House was generally loudly calling for that. Alex Hebner (11:38) Yeah, I would agree. Jim Glennon (11:38) But that's a parallel universe that we may never know the answer to. Otherwise a quiet week is probably why so many of the fed heads are out speaking this week. It's hard to know what sort of language would cause the market to change much more than it already has. feels like that we've already baked in possible rate hikes this year. There'd have to be some sort of. odd word or some sort of implication of panic from the Fed, think, to cause people to be much more worried about yields going up. Alex Hebner (12:08) Yep. Yeah, another reason they're speaking this week is they enter their blackout period, I believe on Monday before the end of April meeting. So get the speaking engagements in while they can. But yeah, the third week of the month is generally pretty quiet on the data front. So we'll check back in next week. Jim Glennon (12:17) Right. Alright, sounds good. Anything else? Alex Hebner (12:32) I don't think so. Just keep an eye on those headlines and look for any shifts in sentiment. Jim Glennon (12:36) Absolutely. Good advice. All right. Thanks a lot, Alex. Jim Glennon (12:40) Okay, we are back. We've got Alex, of course, and we've got Karim. Welcome, Karim. Thanks for being here. Karim Maaliki (12:46) Thanks for having me. Jim Glennon (12:48) Yeah, man. So as promised, there's a couple of things we want to get into today. It's been a while since we've had a guest from the desk on, other than of course, our market experts, James and Alex and, and Vimy. We wanted to just talk through a couple of things here. And I think Alex and I will just start off with hedging, right? We are the hedging and trading team. We do a ton of other things for our customers, which we'll get into here in a minute with Karim, but generally wanted to. talk through kind of the high level of what is hedging, like the actual physics or math or need for hedging in our industry and in other industries. like, where does it come into play in the mortgage origination process versus something like say airline tickets, right? I try to tie those things together. So backing up a little bit, like why do we even need hedging or where does it fall into the process of mortgage origination? And to me, it starts with Like pricing, mortgage pricing. You may have heard people say that. You may have heard Bill Pulte tweet about it recently. And if you've ever bought a home, you've talked to a loan officer perhaps, or you've talked to someone online about locking in your interest rate. Right? So first our technology is generally the bellwether for mortgage pricing. So there's a ton of buyers of mortgage loans out there that generally set a market for what's my interest rate? That's what comes out of these analysis that our systems do. What interest rate can a borrower get? What interest rate should I give if I'm a loan officer to a borrower? Right? So we're talking about that through the process. And then at some point, the originator of the loan officer says, all right, today's a good day to lock your loan. We're going to lock in that interest rate. We're going to guarantee you that interest rate for 30, 45, 60 days, no matter what interest rates overall are going to do during that time. So how is that possible? Like how can we... promised that interest rate for a long period of time, for more than a few hours for a bar, we're knowing that interest rates can gyrate pretty wildly, like they've been recently. Like we've talked about the OB-MMI and every mortgage interest rate out there has gone up roughly half a point during this conflict that we're having in the Middle East right now. Like how do you foresee that? How do you hedge against that movement? So. You know, one thing that comes to mind for me, and I've used this analogy on this podcast and other podcasts before, and it's also timely, is airlines. Right now, airlines are obviously contemplating major increases in ticket prices, and they've probably already made some of those moves because jet fuel is just more expensive now than it was two months ago. Right? But they've also already sold tickets for flights that are going to be taking off in April. May and June and beyond then, right? So how do airlines handle this sort of situation similar to the mortgage loan dilemma? It's the hedge. A lot of airlines hedge. Some don't. Some have kind of done away with that process and accepted losses over time because they feel like it's cost too much to hedge in the past. But let's say we're one of the airlines that does hedge with fuel futures. I'm selling tickets today for flights that are again, two, three, five, six months in the future. I may decide to hedge my biggest expense other than people, which is jet fuel, right? I'm going to hedge with oil is likely what a lot of these airlines are doing. So I'm going to do some open market trades for oil. I'm going to basically lock in the price of oil for the foreseeable future for two, six. 12 months down the road. I'm gonna pay a little bit to do that, but that's gonna be my hedge against whatever you wanna call it, inflation or increases in fuel prices so that when I sell those tickets, I know that I've made my profit margin on those tickets even though the plane's not gonna take off until August, for instance. So if prices continue to climb, I'm hedged. If prices go down, I'm in a good position as well. If prices stay the same, I'm also in a fine position. Very same thing happens with. with mortgages. When you say Alex, like you kind of talk through how you could tie a parallel between like jet fuel and interest rates. Alex Hebner (17:14) Definitely, definitely. think, you know, in the popular imagination, especially post Wolf of Wall Street movie, think a lot of people think of hedge. When I think hedging, they think of hyper-leveraged bets and Wall Street. That's not what we're doing. When we say we're hedging, what we're doing is locking in a price today. You as the borrower walk away with a locked rate. The people extending that rate to you, they also want to lock in that rate as well. And so how we achieve that is through TBA mortgage forwards. which essentially, when you buy your rate from the mortgage lender, they're gonna also sell that rate forward, get a price on that today that they can then deliver that loan into in 45, 60 days, however long it takes for everything to get closed, you to sign and get keys for your new house. Jim Glennon (18:03) Great. Yeah, like you said, really relatively simple, not super intimidating. There's some fine tuning that our models will do to ensure that you're really hedging down to like the fraction of a percentage point so that no matter what the market does and how quickly it does it, you're maintaining that profitability that you were trying to make the day that you agreed with that borrower to lock that loan. Right. So again, similar to an airline or you know, this happens in lots of industries that deal in Alex Hebner (18:26) Yeah. Jim Glennon (18:33) large scale sales that happen in the future, right? Maybe it's food, certain types of commodities like food. You hear people trading coffee futures or futures in hogs for things like bacon and other various delicious products. that's generally same kind of concept. Again, they've promised certain products to be delivered in the future and they're going to hedge the price of those products on the open market. Cause especially the last few years, Everyone's read about beef prices rising and dropping the price of whatever, carrots, butter, eggs, right? Like all these things, many of these things have an effective hedge that you can use to hedge the price of these goods. So then what happens at the end, right? So let's say we did guarantee this interest rate for 45 to 60 days for this borrower, and then that loan closes, they get the keys to their home or they get their refinance. Then I think... The last thing that a lot of folks don't understand about mortgage lending is, or you may, now that you've had a mortgage loan and you may have experienced the, what we call the hello goodbye letter, you get a letter in the mail, 45 days after you close your loan, it says, remember me, we did a loan together 45 days ago, but now you're going to be dealing with Bank of America. Are you going to be dealing with Chase or Wells Fargo or Penny Mac or one of these other, what we call aggregators, right? Most likely, if you're dealing with a small lender, especially, or an independent lender, they're to be able to get you a great rate just as well as anyone, you know, as it may be even better than some of the big banks. But they will take that loan then that they closed with you and they'll sell it because they need to get that. They need to get money back so that they can lend to the next borrower. So that's something to keep in mind and something that we do again on the desk that we'll get into with, with Karim here in a second. In fact, why don't we just kind of make that the segue? So we've sold the loan. Then we start the whole cycle over again, that same lender bringing in new loans, locking new loans, and we're hedging those in just kind of a large position or corpus of mortgage loans that are constantly coming in and being sold out the back. And meanwhile, we're hedging that interest rate risk throughout that process. So, Karim, put a little pressure on you now, day in the life, right? Again, we've talked through this process and high level, is relatively simple in theory. There's a lot of fine tuning that goes into it, a lot of expertise that you and the rest of our teammates need to have to do this effectively. There's also a ton of other things we do at this job. We're going to try to talk about all of them in the next like seven minutes. where to start? So first of all, anything that Alex and I got wrong, I haven't been on the desk, you know, trading in many years. Did I do anything backwards? Karim Maaliki (21:21) You No, I think you did a good job. I think you got the main points there. Jim Glennon (21:28) All right, very So yeah, where does it start for you? Like, what is the day in the life of Karim? You come in in the morning, whether we're in the office or we're, you know, working from home, kind of how do you start your day? What are some of the more, I don't know, the unsung attributes, know, aspects of this job that most people may not know about? Karim Maaliki (21:48) For sure. I think primarily, right? When I log on in the morning, most important thing to do is to make sure we're getting all the data in for all of our clients and kind of diagnosing what happened overnight. We have some clients that open post market hours, right? They'll keep a lock desk open until 8 p.m. Eastern or something like that. And I want to make sure that if any locks were closed in that time period, I can at that point go in and make sure that the position is flat. meaning that we hedge those logs that came in after the hours. So the main thing that I do in the morning, I log in and I just take a look at data, take a look at positions, make sure everyone is risk neutral, meaning that we are correctly covering any locks our lenders have made in the time period from closed to open. Alex Hebner (22:44) be familiar, the bond market, is what we utilize to take out our hedging contracts, that closes at 5 p.m. Eastern. So in Kribs example here, if the lock desk is open until 8 p.m. Eastern, perhaps you're a West Coast lender, might have three hours worth of locks that were not hedged on the day of the lock. They have to be hedged the next morning. Karim Maaliki (23:02) First. Jim Glennon (23:03) Right. And, and, and data, the thing I just keyed in on was data too, that I hadn't mentioned earlier on, like really have to have good data to equal good hedging. mentor who used to tell, ⁓ clients and me and us that all the time, good data equals good hedging. It's like any other thing. If you get garbage in, you're going to get garbage out. So yeah, one of the things we rely on heavily from our clients is to produce and send us good data through our various system integrations, but also our system does some checks on that to make sure that the data generally makes sense, that there's not large inconsistencies day over day or hour over hour, so that we can kind of fluidly start in the morning and begin kind of good hedging when that market opens at 6 a.m. Mountain time. Karim Maaliki (23:50) For sure. Yeah. And I think, speaking of data, right. think a large driver for all of our clients, right. I am bees independent mortgage banks, credit unions, everyone that utilizes compass edge or OBSS or compass in general, right. P and L is the main driver, right. Profit and loss to stay in business. You got to be profitable. You can't be just hemorrhaging money. So Jim Glennon (24:15) Mm-hmm. Karim Maaliki (24:17) Speaking of data, right? I think something that I dig into every morning as well is I will hop into a client site. I'll take a look at their data in general. I'll kind of keep track of their gain loss. I'll see if there's any, we call them bleeds, right? If there's anything that's kind of screaming out to me, hey, this is something that we should correct. This is a, someone fat fingered a number in the LOS, the origination system. And we can kind of correct that and kind of keep trend of, we maintaining the profit that the client expects day over day? Jim Glennon (24:51) Yeah, that's another good point, right? I think when people hear hedging, they think we're trying to make money. We're trying to extract some sort of alpha out of this process. We're trying to time the market, which couldn't be further from the truth, especially in mortgage hedging, right? We're trying to maintain a profit margin that the lender, our client, determined on day one, right? We're not trying to make more than that or certainly not trying to make less. We're trying to say we've built in a healthy profit margin on the Jones loan and we intend to maintain that throughout that 45, 60 days, no matter what the market does, and then execute on that when we sell that loan 45 to 60 days from now. That's another good, I think, misconception about hedging. A hedge fund, for instance, is trying to make money. It's trying to invest your money and be relatively market friendly, market neutral-ish, but trying to extract alpha. With hedging and mortgages, we're not looking to make money. We're just looking to maintain the money that we've... We've decided we're building it up front. we've kind of moved through your morning. We've made sure the data is good, positions are good. We've done a little bit of trading. Then of course, again, it's not just the Jones loan, it's millions of other loans, millions of other lines of data that we're receiving and sending out. And every day we're selling loans, right? Whether we're doing that for the client or the client's using our system to do that. we've got a very liquid, kind of dynamic Karim Maaliki (26:10) Mm-hmm. Jim Glennon (26:20) market for mortgage loans, which is something no other country in the world has and probably in no other time of history has there's been this much liquidity, this many buyers and this much kind of transparency into what that market is. So it's probably another thing that a lot of folks don't know about is kind of what, you know, that that exists and how we are a participant in that, how our clients are as well. So walk us through that. That's kind of later in the morning, right? Market is kind of settled. rates are out there for new borrowers to get and come in. managed our clients' positions to what we call market neutral, right? We have as many trades on as we do loans in the pipeline, but then we start selling loans out into the secondary market, right? Karim Maaliki (27:02) Totally, right? That's kind of the name of the game. We lock loans in 45 days later, we got to sell these loans. Typically most of our clients will sell loans to aggregators as Jim mentioned prior, probably once or twice a week. It's kind of dependent on the client's needs, We'll sell for some clients every single day. We'll sell for clients, some clients once a month, kind of all depends on their business structure and what they're kind of going through as far as their procedural steps. So we'll at that point start sending loans out to the aggregators using CompassEdge system, right? Pretty streamlined essentially. We just send all of our loans to the aggregators through a bid tape, they pass back their bids and we run best execution, right? So we essentially just price out the best execution for each single loan. And then we'll commit those at that time. And by committing those, kind of promise them, promise the aggregators that we will deliver those loans in about a seven day window, right? It's not instantaneous. some parts of the mortgage market are still a little bit behind the curve. We just don't like paper notes. You got to deliver and send. So there's always a little bit of a buffer between the committing and the funds actually being received from the clients. But we'll sell those loans. And after we sell those loans, right, because we have fulfilled that future, we need to at that point, lift our future contract back. Right. So when we took that lockdown 45 days ago, we down a trade covering that future market interest rate movement. And at that point, after we commit the loan, about 45 days later, we will buy it back from the broker dealer who we took down the coverage with. And at that point, the cycle has pretty much closed for all intents and purposes, right? And we have hopefully re maintained and captured that predetermined profit margin for the lock. Jim Glennon (29:00) Right. the, I, if I could paraphrase, so basically you got, you got all these loans today, you got the Jones loan and 50 others that are similar, but different, and you're auctioning them off. This is an auction, right? So there might be 30 different bidders that bid on the Jones loan and all of these others, and they bid on them individually. And then as you said, we do an analysis that says, all right, these four loans are going to go here. These two here, these, this one here, just the absolute best execution possible best sale price for each loan within that. group of loans that were auctioned off that day. So you've made that commitment, then you may have made money or lost money on those loans over the last 45 days. This is where it gets kind of, this is what we're talking about with hedging in the market, right? So if interest rates have gone up like they have in our industry in the past month and a half because of the war, those loans that were locked back in March are worth less than when they were locked in March, right? Because interest rates have gone up, but we're still. giving that borrower a five and seven eights when rates are at six and a half. But we've hedged them. We've put on open market trades that have gained value throughout that time, throughout that previous 45 days. So today you sell the Jones loan and a bunch of others like it for a loss, but you're going to close out those trades that you took out 45 days ago and those made money. So that net difference has protected that margin that was built in by that lender on day one. That's the crux of it. That's the... That's the answer. When people ask what is hedging, like that's what it is, right? That's the, what can be intimidating to hear at first, but once you walk through those mechanics, relatively simple in terms of the math, there's there again, for some fine tuning that goes on in the background, but generally speaking, sell one side of the equation for a loss, sell the other side for a gain and you end up with a gain, which is the margin you built in on day one. Cool. Alex Hebner (30:50) And just a quick clarifying point, when we're doing these loan sales, the vast majority of these loans are being sold into what we call a mandatory commitment, which means that ⁓ if you're a smaller lender who may be just looking at hedging for the first time, you might much more so be familiar with the best efforts commitment, i.e. you're making a best effort to deliver that loan, but there's no penalty should you not deliver that loan if you have to cancel that contract. When we were talking about mandatory commitments as the definition of mandatory, maybe gives you a hint, you are expected to deliver that loan into that aggregator's commitment. And if you are unable deliver that loan or provide a substitute, there is a fee that has to be processed during that time period. That's a little bit deeper, maybe hedging 201 to keep in mind, but it's just something to keep in mind if you are just looking at hedging for the first time. Jim Glennon (31:40) Right. No, good distinction. Mandatory versus best efforts, just trying to get that absolute best execution you can. when you graduate to working with us this is the general kind of concept that a lot of folks will get introduced to. And again, kind of remove some of the mystique around it, because it is, again, relatively simple on paper. And you've got experts working with you on our desk to do all of these intricate details. So we sold all those loans and we've got the money back, right? That's the important part is we sell 20 loans today that we've kind of advanced on a line of credit and now we're get all that money back so we can lend to another 20 borrowers tomorrow. And meanwhile, we're managing and reviewing things like P &L, like you said, Karim, just to be sure that the machine is well oiled and working for us and for the client. So what else do we do? That's like just a little piece of what we do. to me the tactical part of what we do. What other things do do throughout the day when you've got a little time, whether you're waiting for bids to come back or you're kind of middle of the day between, know, calls with broker dealers and loan sales. What else do we do to serve our clients? Karim Maaliki (32:51) Hmm. I think honestly, the majority of the time in general, right through my ⁓ day as a account manager, I spend almost all day with on the phone with our clients, right? And each client comes in with a bunch of different questions and they have different needs. And essentially me and my team, we hop on and we kind of just address whatever they need to get addressed, right? Whether that's why don't we talk about P and L. Why don't we hop on the phone and go over last month's accounting report and see where we are from. at the end of March, for instance, versus the end of February. Some clients are kind of a little back in the times and they want to get updated on all of our new that Compass Edge provides, or they have a new business strategy that they want to discuss, right? So we kind of hop on the phone with all of our clients and just address their needs as they need, right? So whether that's... implementing a new part of Compass Edge or talking strategy. Another big part, right? I think since the implementation of the Edge platform, we've moved over a lot of clients to from full service to self-service, right? And what that means for us specifically, right? Full service clients, we do the hedging and the trading and the committing, right? So all those kinds of steps that we've talked about prior, Jim, kind of take care of that for the client completely, right? They send us back data and we take care of it from there. We'll probably hop on once a month and discuss P &L and stuff like that, but they're pretty hands off, right? we've been doing a lot of recently actually is moving clients from full service to self-service where they take ownership of the loan sales, they'll take ownership of the hedging and the trading in general, right? And a lot of my day is kind of just focused on teaching them how to do what we do essentially on the desk from the tactical perspective. Jim Glennon (34:53) Yeah, man. I think you keyed in on a few things there that I'm super proud of about what we've always done and what we've always been. And we've always really, to me, been an extension of our client's capital markets division. So every mortgage bank, no matter how big or small, has capital markets people that manage that huge part of their strategy and their P &L. we have those discussions every single day, as you said, throughout the day about strategy. We're very open about talking about what we see other clients doing and using that to help clients do better. Who should I be? What should my counterparties be? What aggregators should I be selling loans to? What broker dealers should I be implementing to get the best possible pricing out in the market? And then further, we want the client to get comfortable with these different things that we do tactically so that they can do it on their own. That's like the ultimate, I think, goal for us. And the goal of the new system that we've built is to make that super approachable, right? And to, over time, have that client get comfortable with our confidence in what we do to the point where they can do it as well. We still are there for them to talk strategy and all these other things that we do, but they take over kind of the reins. If you will, they drive the car, but we're still, you know, in the pits and we're still on the phone with them every day, ⁓ talking them through it. So yeah, thanks for talking through that. That's to me, that's one the most important things we do. Maybe the most important is kind of act as this. extension of their business. Karim Maaliki (36:22) Totally. I totally agree. think honestly, especially as times have gone on, like I said, the amount of time I'm spending hedging and trading and committing has gotten way less as we've gotten more clients comfortable with our system and understanding the model, understanding secondary in general. that's my favorite part of the job as well. You know, just talking to clients, get so many personalities and ⁓ Jim Glennon (36:44) Yeah. Karim Maaliki (36:44) Yeah. And honestly, you just get to learn a lot of different business strategies from different clients that you can kind of like help out in general, right? One client's doing one thing that you can kind of pass back to a different client that might be struggling with something similar. Jim Glennon (36:58) Right. Just general best practices. know, what we see out there, because we are generally we're a nexus, if you will, or a hub of this industry with over 300 clients that we talk to day in, day out. We do have valuable information that sometimes we take for granted. So yeah, I miss, I do talk to clients every day, but not all of them. So I do miss some of the personalities sometimes that y'all get to deal with constantly. yeah, but hope to see more clients out there. We've, you know, we certainly don't just. discuss things with clients over the phone. We also have our conferences and industry conferences that the three of us and many others will attend throughout 2026. All right. I think we covered some good stuff there. Great segment. Thank you very much, Alex. And of course, thank you, Karim, for being on today. Karim Maaliki (37:46) Course. Alex Hebner (37:47) Thanks for being here, Karim. Jim Glennon (37:48) All right, thanks, gents. Jim Glennon (37:50) All right, let's close this thing out. Thanks so much, Karim and Alex. Great conversation today. Very informative, educational, and also timely. That's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.

Jim Glennon (00:00) Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Welcome everybody. We have a great show as always for you today. Thanks for being here this week. In the interest of making sure you know what to watch out for, whether you're an originator, a capital markets person, or just someone who's interested in the mortgage industry. and some great market commentary. Here we are. So we'll start with the market update as always. We'll discuss the latest on the market impacts of the Iran war. A lot going on there over the past five weeks at this point. We'll tie that back to interest rates, of course, and equities. There's a lot of interplay there. And of course, we'll talk about some numbers we saw last week. We had the non-farm payroll, the unemployment report, and a couple other odds and ends with Alex and James here in a second. Then we will have Mike and Brendan on to give you all a preview of our market advantage report that comes out later this month. So just lots of great data and insights to talk about there. Before we get into it, in the way of high level data, the OB-MMI, just interest rates in general, not where we want them to be right now, but the OB-MMI, the conventional 30 year has been holding a range between about 6.3 and 6.5 over this past week. The 10 year treasury, really similar range except two points lower, of course, between about 4.3, 4.5. We'll talk more about why that is here in a moment. Let's transition over to Alex and James and talk about the market. Alex Hebner (01:56) Welcome everybody to the economic portion of this week's optimal insights podcast. I'm here, myself, Alex here with James Cahill from our head of your trading desk in DC. ⁓ just to talk a little bit of economics and what's changed over the past week. ⁓ James, think just jumping right into it. We'll jump into a little bit of data. we got the non-farm payrolls number on Friday. How did that look? James Cahill (02:19) Yeah, so that employment report came out. It was bit of a surprise. So based on February's numbers, which had been negative, consensus was at best around 59K an increase, which is pretty much a dud. But what it came out to be was about in new job openings. This pushes unemployment down to 4.3 instead of 4.4%. so, Hey, that great, you know, moving in the right direction. ⁓ when you take those numbers, you know, step back and look, you'll see February actually got revised even lower. So rather than a loss of 92,000, was a loss of 133,000. I know you've been talking a lot about this too, is in February, there was definitely some noise from a strike in the healthcare industry. that was resolved into March. So a lot of those numbers should have made February look worse, should have made March look better. But it's definitely a boon to see this kind of a push. the I heard was, well, you know, let's see what happens after the revisions. Let's see if this 178 number sticks around. Alex Hebner (03:39) Absolutely, I'm in agreement there. I'm going to be both February and this March number. I'm very interested to see how the revisions on it go, if they get a little bit tempered down to closer to a zero number. But as we've seen with the initial revision on February, that wasn't the case. I think when you would take a step back, like you said, and look at this on an average basis, you know, we were back 133 in February plus 178 here in March, average those out over the course of two months, we've had plus 40,000 jobs or so over the course of two months, you know, so really it feels as if we're missing one of those months that we would have otherwise just kind of skipped over when it's plus 50K. So definitely still a hole there, I would say. in the labor market from these two releases. James Cahill (04:26) Yeah, the one piece that was kind of more interesting with it was, you know, when this February number came out, immediately people started talking about actually a rate hike this year. We ended up with almost a 25 % chance of a rate hike by December. After this positive number, that's dropped more to like only 10%. It looks a lot more like, well, rates will be staying as they are, is the current consensus. So. Those, you the number both last month and this month definitely has bullied our rate expectations around. Alex Hebner (05:02) Definitely agree to it. From everything I've seen, it's going to be a pretty flat rate path out of the FMC for the foreseeable future if things stay as they stay happen here for the past month or so. James Cahill (05:13) Yeah, and so with, you know, forward projecting of rate paths, also seeing in the future here, PCE this week, this is the Fed's preferred inflation number, as we always say. It's currently expected to stay at that 2.8 % number. And then Friday, we'll be seeing CPI as well. This number is going to sit about we're seeing It's not moving compared to last month or really the month before. is interesting is if you went one year back today or this month, it was actually liberation day. So that's when the tariffs first came into place. The market really had a tantrum over it. The conversation was inflation. The conversation was stagflation. What is going to happen? Here we are one year on. is only, you know, a point. than where the Fed would like it to be. The good news is it's much better than some of the doomsday or worst case scenarios that we were thinking and talking about back when the tariffs first got put in place, but it is higher than anyone would like it to be. I'm sure everyone would be happy to never hear the word inflation ever again. So 3.3, 1.3 points above the Fed's general rate. It's not quite where they'd like it to be a year on. Alex Hebner (06:38) Definitely. I think especially probably this month, what we're keeping an eye on is it seems to be creeping up just a little bit in the past few releases. So we want to keep an eye on that. And the geopolitical landscape isn't doing this number any favors. I think a lot of folks would probably make the argument that that sans any geopolitical issues that this number would be much lower than we're currently seeing it at. I think the main concern of what markets are going to really keep their eyes on. this week is in regards to that CPI number, specifically the non-core number that includes the very volatile energy and food costs. You know, at this time, looking at those energy costs, the non-core number is the expectation is potentially for a month over month, jump of anything beyond that, I think would really shake the market up. And like you said, 3.3%, we'd be well on our way to that with that kind of release. James Cahill (07:33) Speaking of geopolitics, so as of this morning, gas is sitting ⁓ around $4.12, up $2 from the end of February. It's ⁓ a painful place to be, but we're still chugging along. Oil futures are almost $110 a barrel. And there's a conversation about those are the future prices. if you look at the spot prices, so immediate to 30 day delivery, it's much closer or $141, $2. So there's some real, know, how long can we have prices this high? The United States is a net exporter. We're a little bit more able to weather this, but supply and demand works as it does. So those prices are going to continue to increase unless we see a resolution soon. Speaking, you know, as of this moment, the weekend, administration sent out a threat that Tuesday was a day to get a deal done or kind of no turning back. We'll see if, if they get a deal or if that, holds, but it's definitely something to keep your eye on. would say Monday and Tuesday night, I would hedge to flat, make sure your position is exactly zero, as close as you can be. Alex Hebner (08:54) Agreed he was saying that this is his final deadline. I think he's had a lot of taco type accusations leveled against him in regards to all the peace deals that may or may not be in the works. He does say that this is the final warning they're kind of on the matter. We'll have to see here in the next 24 hours or so if those threats pan out and if the peace talks that have allegedly been going on between Iran and Pakistan. as the intermediary in the US, if we can get anything here in the next 24 hours. But yes, I'm with you there, James. definitely do not be, it's not the time to be taking positions. Definitely be hedging to flat. ⁓ Generally we showed ourselves a little bit short to cover any incoming locks, but I think flat is definitely the move over the next ⁓ half week or so. James Cahill (09:42) more, you know, rate related and within the country. Kevin Warsh is a nomination hearing is set for mid April. So the next two weeks, you know, they will have the hearing. He will sit and they'll decide whether or not he in theory could be the fed head, but Senator Tom Tullis is still holding out that he's not going to approve of anything until the investigation around. Jerome Powell in the Fed is resolved. is actually, he's not up for reelection. He's leaving after the midterms, but that means he's kind of a lame duck until January. So plenty of time for him to just drag this out. So I think that that's gonna be a conversation again, once Warsh gets theoretically approved, but held back. Is there anything the administration can do to just push him through? Alex Hebner (10:33) Definitely, definitely. As we approach Powell's official end of his tenure, I can expect this to much more so enter the financial news media. And I think it's something we'd already be talking about if not for the geopolitical situation that's currently we'll just have to see here. Again, think Tillis, like he said, he's a lame duck, but he could drag this on well into the fall if he truly wanted to. James Cahill (10:58) Yep, all the way until the last day for all he can ever see is out. Alex Hebner (11:00) Yep, absolutely. Yep. James Cahill (11:03) That's mostly it for you know looking forward this week other than of course the the biggest news Alex any opinion Yukon Michigan any teams? Alex Hebner (11:11) Miss you. You know, I don't really have a dog in that fight, but I've got some good friends who are big Michigan fans, so I'm gonna have to go Michigan on that one. James Cahill (11:19) Okay, good luck. Stick with my family, we're going UConn. Alex Hebner (11:24) Here you go, here we go. Perfect, we'll wrap it up there for this week. Coming up in the next segment, we have Mike Vo and Brennan O'Connell on their monthly talk here to talk about the Market Advantage Report, which is released every month. And you can learn more in the following segment. Thank you. Mike Vough (11:45) Welcome to the March Market Advantage Recap. And sure, it was a month of March madness, not just with basketball, but also with the rate movements that we've seen in some of the macroeconomic events that have been impacting the rate environment. Brandon, why don't you kick us off with some of the origination findings that we've seen given some of that volatility that we experienced this month. Brennan O'Connell (12:09) know, Q1 finished on a high note from an origination activity perspective. think a lot of that probably occurred early in the month. And then I think certainly some of the impact rates that we saw towards the back half of March, I'm sure we'll see that play out in April numbers, March lock activity, really resilient. Total lock volume up 13 % over February more encouragingly 26 % year over year. Reflecting in a growing for purchase mortgage money. So purchase activity led the was up 38 % from February relatively 20 % year over year has been taking share of purchase kind of secular trend over the last several months demand has now reached 71 % of total production So really great to see the purchase market, which is, you know, it's going be more stable, less rate dependent, and really great to see that, ⁓ start off strong here and kind of the beginning of the spring selling season. On the refi side, cash outs increased 9 % month over month, 21 % year over year. rate term loans were down month over month, sort of unsurprisingly given where we're where rates went in March, they were down 34%, but still up 65 % from the same time in 2024. So RefiShare then down to just below 30%. In terms of rates, where do we finish? rates moved higher across all major products to finish the month. OBMMI 30-year conforming rate was at 6.35%, up 45 bips. from the same time at the end of February, jumbo rates rose 41 bips, FHA 21 and VA 44 bips. Despite the increase, we're still 15 to 20 basis points better than we were at the same time last year. Quick note on spreads, the 10-year treasury ended March at 430, up 33 basis points month over month and the spread modestly. So it's just above 200 basis points, the LBMI. primary rate versus the 10-year treasury. on the product mix side. So we saw conforming share decline to roughly 50 % of total volume. FHA sits at 18.5%, nonconforming around up a little bit of share in March and then VA share slipped a bit to just above 12%. Government lending though, I think still in a stronger position now than it was certainly a few years ago. a couple other odds and ends. think affordability metrics move a lot. So I think that's encouraging. We want to see here that first time home buyers aren't being locked out of the market by higher rates. I think that that's certainly a concern for the general population. So 46 % of conforming purchase coming from first time home buyers, over 70 % for FHA and VA held held where it was at around 46%. DTI ratios remained stable, actually a little bit down too. So conforming 36, a little bit above 36 for DTIs, FHA 43%. And then VA at 42 or just below 43. And then finally here, I think, you when we talk about some of the more macro trends that we've seen, both around ARM lending and then non QM as well. think just given the rate environment, we've seen an increase on both of those products over time that we're tracking. ARM usage did continue to climb, ended March at ⁓ roughly 12%. That's the highest mark since October of 22 and really well above pre-pandemic levels. So these adjustable rate mortgages certainly are coming back. You know, it's nothing like what we saw 15 years ago, but certainly well above what we saw five years ago and above anything that we've seen, above anything we've seen in the last five years. And then non-QM lending has been kind of consistent to start 2025, around 8%. Haven't really seen, we'd been on kind of a trajectory, an upward trajectory to end 2024 in terms of non-QM taking share overall. We haven't really seen that continue. It's sort of plateaued. I don't know that there is any story there. law of large numbers, we'll kind of see as we get into the spring buying season, if non QM continues to grow. In terms of, you know, within that umbrella of non QM, the investor and DSCR programs did show a pretty strong month in March. So continuing to see folks ⁓ buying up rental properties as a methodology here to earn income. Oh, and then one other point, I think I failed to mention it last month, but we're over 400,000 for the average loan amount, which is, you know, it's just sort of crazy that that's where we're at. And we ticked back slightly in March, we were down to just above 401, down from 404 in February. But again, we're sitting comfortably above $400,000 as the average loan amount the United States. It's a big number for folks. And Mike, I think you have some. Stories around that as it relates to spec pools as well. Maybe that's a good segue for you to jump into the secondary. Mike Vough (17:33) Yeah, thanks for the assist, Brian. Great segue there. One of the things that we're watching this month in April is that Fannie and Freddie releasing a specified pay up for loans greater than 400 and less than 425 and greater than 425 less than 450. These are two additional 25K buckets that they're going to be supporting via the cash window. So paying up for loans that are a smidge above the average that Brennan mentioned there. because they're less likely to prepay than maybe your 700 or 800K loan. It's really interesting how this kind of starts. It starts with demand capital markets, right? So, folks who are creating structured pools, folks who are creating collateralized mortgage obligations, they're looking for this mix and match of prepay sensitivity to really level off and get repeatable recurring cash flows for that end buyer of the mortgage bonds. And as analytics and data have gotten better and better, we've been carving up more and more of these loans, these loan cohorts to find specific cohorts that prepay differently than the average loan. And so now we're moving to a world where Fannie and Freddie are going to be supporting these next two tiers of 25K specified payups. And it's having some interesting reverberations throughout the industry. So first it starts with those folks in Wall Street or broker dealer community, they look for lenders who are securitizing this. So you see those top 20 lenders may have already been securitizing these pool cohorts already, and then gets more adoption and it becomes more durable. And then it eventually will pass towards lenders putting it into their rate sheets. And then eventually it gets to the agency cash windows supporting those specified pools. And then everybody who's able to sell to the agencies can take advantage of that, right? It's kind of limited first to those large folks who are pulling on themselves or they're on their own. And then it moves the folks who are selling on like a one-by-one basis to the agency cash window. And we're going to see that this weekend. It's actually having quite a bit of impact. Historically, we've talked about this number on the podcast before. we were seeing across our hedge pipelines about 72 or 73 % of loans on average eligible for a specified pay up. Now, if you think about on the low, balance, which is they call these low pools, you're looking for anything that is less than that 400 number. Now we're up to 450. And then you layer on things like investment in second homes, lower FICO scores. You look at different states that have refi taxes. There are all types of ways this is being cut up. And we're going to see that 72 or 73 % number quickly become almost 80 % of loans eligible for some type of specified pay up right now. know, it dovetails nicely with a trend we saw this month where we saw loans sold to the cash window increase about 100 basis points month over month, chipping away at MBS securitization an outlet. And I think we might see more of that trend continue. We've seen the cash window really increase in terms of monthly origination share in our system, almost up 10 % from the beginning of the year till now. So I think we might see even more of that over the course of the month. Moving on, also have best effort mandatory spreads have decreased three basis points for conventional loans this month and five basis points for government 30 year while the conforming 15 year increased seven basis points. Interesting trend. Not sure it says a whole lot on a macro level, but we'll keep an eye on it. one that's interesting and expected, you on average we saw OB-MMI up approximately 20 basis points over the course of the month. And with that, saw MSR values increased about six basis points. to on average a shade under a five multiple or a 1.25 price on a 25 basis point strip of servicing. Again, it's expected as rates go up, it's less likely that folks refi and there's that larger trend here of folks are paying up for loan amounts that they think are less likely to refi. The same thing as being held constant on the servicing side as well. As rates increase, that borrower that was originated at that five and three quarters, or that five and seven eights now is not likely to refine the short term here at all if rates are in that, you know, six three to six five range. So servicing is, you know, the demand for that asset has been up. Even when we saw rates decrease, we saw the price continue to kind of tick, tick, tick closer at five multiple. And this is just another excuse for that. Another stat, two more stats to round this out here. You know, loans sold to the highest price increased a hundred basis points this month to 79%. of where we saw loan sales executed last month compared to 78%. Despite some of these headwinds that we're seeing with going up and conversely with some tailwinds with volume up, lenders are still looking for the best execution the vast majority of the time. They're not weighing some of these secondary or tertiary factors when doing loan sales. The best price is winning and continue to kind of increase there. And lastly, to wrap us up here, Our investor count, which is the metric that we use to track the amount of investors that are bidding on your average loan sales, stayed flat at 14. This is our second or third month in a row that we were stuck at 14. But if the listeners remember, we did have an increase at the end of last year when it went from about 12 to 14. So just an interesting trend to keep watching. If we see that number start to tick down, that will be an interesting stat to watch to see if some of these other profitability numbers then follow that suit. Brennan O'Connell (23:24) was just going to jump in Mike and mention, I'd be remiss if I didn't let our listeners know this, and it's going to serve this, way each month going forward, this, this podcast and the release of this commentary will, show up before the market advantage report, which is obviously the sort of accessory report to this, this recording. so for folks that are able to tune in and listen here our dialogue. You're gonna get the updates on the monthly statistics before the Market Advantage Report comes out. But a good start to Q1. Mike Vough (23:57) Yeah, good start to Q1. think folks would generally like to see rates back where they were about 30 days ago. But even despite that right now, I think folks have have weathered a lot of storms in terms of the rate volatility that we've been seeing the past six years now at this point. So going to be interesting to see how long this this is a prolonged rate increase up. But generally, when we were in that five and three quarters to five and seven eighths range, I felt like there was a lot of momentum. forward. So it sucks to go backwards a little bit, but generally I think folks have the muscle memory and the processes in place to handle this type of move. Awesome. Well, that's it for the March market advantage to Brandon's point. This is the only place to get that sneak peek. So your eyes and ears and peeled listening for ⁓ this podcast going forward. Brennan O'Connell (24:48) Thanks all, we'll see you next month. Jim Glennon (24:49) All right, we are ready to wrap this thing up. Thank you so much, Alex and James, and of course, Brennan and Mike. Great episode once again. And that's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.

Jim Glennon (00:01) Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Welcome everybody. As always, I have a great show for you this week. we begin, I wanted to draw your attention to something pretty interesting. Optimal Blue just completed basically an ROI. study. The key findings of that study, they're out right now. You can check them out on our website, but more good stuff to come from that report. The objectives of the study were to quantify real economic value of using optimal blue products, basically. So demonstrable ecosystem level impact on your mortgage operations. So essentially an operational and financial impact study. So yeah, go check it out. It was done by a third party. I think that just did a really nice. Really nice job with Okay. Getting back to it in the interest of making sure you know what to watch, whether you're an originator, a capital markets person, or just someone interested in the mortgage industry and some great market commentary. We're going to get into a couple of subjects today. We're going to talk market, of course, with James and Alex. And then after that, Alex and I are going to chat a little bit with you all about this kind of credit reporting saga that is taking place right now. So if you've heard people talk about FICO 10T, you've heard people talk about Vantage Score, you've heard Pulte, for instance, tweet about the ability to use some of these new models, especially Vantage Score for scoring, qualifying pricing mortgages. So Alex and I will talk about that here in a little bit. Before we get to any of that, just in the way of data, as you know, since the beginning of the Iran War, rates are up. Unfortunately, and spreads have widened as well. So the 10 years down a little bit at 4.33 compared to last week, but the OB-MMI is still right around 6.5%. So higher than we've seen it in many months. And again, the war has a lot to do with that inflation expectations, that sort of thing. We'll talk about all that in a moment. And spreads are widening between the 10 year and the mortgage, unfortunately. And that has pushed volume down. So let's talk with Alex and James here in a moment and see what's going on in the market. Jim Glennon (02:41) All right, welcome gentlemen. Hey Alex, hey James. Thanks for being here to talk today. Alex Hebner (02:44) Good morning. James Cahill (02:46) Yeah, good morning. Jim Glennon (02:48) Okay. Where to begin? We are 30 days into the war with Iran. Not a ton in the way of developments in the actual war, other than more organizations getting involved. as you might expect with this sort of conflict, you start having pods or cells of other organizations starting to, I don't know, create their own problems in some of their enemy countries or they're attacking us in other countries, our interests and our bases. But anyway, 30 days in, I mean, where do you see it this week? I mean, that's what's dominating the headlines, therefore what's dominating the market, right? Alex Hebner (03:23) Right. Yeah, it's, we can keep this somewhat short, but in regards to week over week changes in this conflict, there hasn't been a ton, there's little flirts of peace deals being offered out on social media. I'd get to see anything that looks really substantive on that, although I think we won't know until it's just about And then in regards to the conflict itself, it's continued kind of a pace, seen some slight expansions there, the Houthis in Yemen who are Iran. linked group. They've begun launching their own drones and missiles. There's some militias in Iraq doing the same towards US bases in Israel. then there's a concurrent operation that Israel has ⁓ launched against Hezbollah in southern Lebanon. So, you know, all these things just continue continuing same as they were last week. ⁓ I think, you know, as someone based in the US, you know, what to keep an eye on here is really that price of oil. It's going to continue to, you know, melt up. the longer the strait remains closed. As we covered last week, the US has better insulation against this strait closure than Asia and Europe does, but it's gonna have global impacts and those impacts are gonna grow by the day as the conflict continues. James Cahill (04:45) Nut oil price, as of recording, it's sitting at about $113 a barrel. This is really the highest we've Looking into stuff like this, was mixing laughs that it's highest served in since 2022, which is not that long ago, but that was when Russia, Ukraine broke out. And then if you want to see a level about that high prior to that date, it's 2008, a spat in 2011, but... you know, it's all of sudden it becomes a decade since we've seen this. It just the last five years has been such a such a rush. But that one hundred and thirteen dollar per barrel, it's it's really pricey. That is not really a long term sustainable price that we want to be seeing. Jim Glennon (05:30) Yeah, as we've talked about, you know, it's up 30, 40, 50 % oil. And that translates to obviously higher prices at the pump, but also higher prices for everything over time, right? Transportation of goods, expensive services. So it's changed expectations significantly in terms of where interest rates may be later on this year. In fact, you know, rate cuts seem off the table at this point. Certainly that's how you would read the CME futures and just listening to what the Fed is saying recently. In fact, it looks like there's a better chance of a hike than a cut at this point. There's almost no chance of cuts later on this year, but there is maybe call it even. Like there's just as much of a chance of a hike as a cut. If you go out until like second half of this year, which is a far cry from where we were before this war started. Alex Hebner (06:27) Absolutely. Yeah, the CME FedWatch, it's flat all the way out through mid, if not late 2027 at this point. think we're going to get greater direction on that once the fighting itself actually stops. think everyone's really in a holding pattern to see how long this damage to energy markets is going to last. I hear the same thing you do, Jeb, of there's whispers out there of, you know, if inflation really does take off, that rate hikes could be necessitated by that. James Cahill (06:56) at the beginning of all this, we said it was, know, there's a four to six week timeline before energy shock should actually start more so showing up just because of how much the length of time it takes to turn these pumping facilities back on to get oil back through. And so here we are at week four, we're bleeding into week five. That puts us, you know, is it gonna end in the next 24 hours, 48 hours before we should see some of this bleeding through? That's really what's pushing. might be more price shocks coming, there might be inflation, maybe we're going to see a rate hike with everything. We haven't really gotten the rates or unemployment or inflation exactly where we want it to be. So it's a little bit sketchier now. We might see a rate hike is why that's starting to pop up. Jim Glennon (07:43) Right. Meanwhile, long-term rates up about half a point since the war started, as we've said, right? So you get OBMMI is about six and a half percent. Ten years, about four and a half percent. So between the inflation expectations and even just the extra $200 billion that the president wants to spend on this war, like all of these things are adding to what would be a supply of debt, which as we know will cause yields to go higher so that those yields will attract. investors. Okay. So what about the microcosm of this short Easter week? As y'all may or may not know, it's kind of like a four and a quarter day week this week. Friday is the market is open on Good Friday, only open for bond markets are only open for four hours, right? It's a kind of a half, half day noon close Eastern time on Friday, partially because there will be A jobs announcement. There will be an unemployment report that comes out at the usual time on Friday. And that's another thing to keep an eye on because the jobs market is obviously the other half of the feds mandate. Last month, so the February jobs report that came out in the first week of March was the first to show a negative non-farm payrolls number. So this time around, we may be expecting Are we expecting something in that range or something small, something close to zero? Alex Hebner (09:20) The expectations in the positive range, but it's in the range that we would have expected out of a pre-COVID non-farm number. It's expected around 45,000 this time around. As you said, Jim, was sharply negative, close to negative 90,000 last time around. There were some labor strikes in there that kind of muddied the water on that. Those jobs will come back on this But even without those, it still would have been a negative release. the conflict in Iran, this has kind of gone by the wayside, but the labor market was what we were concerned about, you know, in February and January, and if there were cracks there, and, you know, if they were beginning to show, and how long those disruptions from AI could be. You know, that's what we talked about the whole back half of last year as we saw inflation taper off into two point something. ⁓ So this could be a sneaky, impactful labor report, in my opinion, just because it's going to bring back some of those Jim Glennon (10:06) Mm-hmm. Alex Hebner (10:14) domestic questions that we've kind of stopped asking as we all read the headlines day after day. Jim Glennon (10:20) Sure. James Cahill (10:21) Yeah, as you know, we've all been talking again about inflation, maybe a rate hike, right? Looking at those numbers with the report coming out this week, the unemployment rate is probably going to go from 4.4 to about 4.5%. So creeping up definitely the wrong direction for this. It's still not any sort of critical level, but as long as it keeps moving in the wrong direction and inflation potentially moving in the wrong direction, that's ⁓ that's stagflationary. We definitely don't want to see that. Jim Glennon (10:51) Right. That four and a half sort of psychological barrier seems to be where the Fed really starts to pay attention, right? Like you said, it's not critical at four and a half, but if we keep moving a tenth of a point in that direction each month, you could see that the Fed being compelled to make a move if we get closer to anything close to 5%. I think four, six, four, seven. We're really in a market that is shrinking at that point, an economy that's shrinking or that the very least it's stagnant. which is not what the Fed wants to see and certainly not what the administration wants to see. What else are we looking forward to this week, gentlemen? James Cahill (11:31) I have the ADP jobs report coming out as well. So just a little bit more jobs information a little earlier. They tend to be a little more volatile than the actual numbers, but in this past year, they were predicting shocks before the official numbers did. So it's a good look at, hey, these are some maybe worst case scenarios. Jim Glennon (11:53) Right. Right. Yeah. That number has been increasingly relied upon, think, especially with some of the, don't know, disbelief with some of the numbers that come out of the Bureau of Labor Statistics. Certainly the White House had some issues with those numbers earlier on ⁓ in the current administration to the point where they replaced some of the high ranking members of that. and who knows if they've actually made significant improvements there where they felt like it was lacking. James Cahill (12:26) Yeah, and with the government shutdowns that have happened this year, it's just become slower to get the government reports. Jim Glennon (12:35) Okay, great. So not a super busy week in terms of numbers, but some big ones. So we'll see the big unemployment report on Friday, likely some news about the war this week as well. Hopefully some good news about a possible de-escalation or even some sort of delay or stoppage in the fighting. And then we'll really find out what that means long-term for the market. All right. Good market update. Thank you gentlemen, as always. Have a good day. James Cahill (13:05) Thank Alex Hebner (13:05) Thank you. Jim Glennon (13:07) All right, Alex, ⁓ something I wanted to cover today. We covered it actually on a webinar, mid last week, and we get a lot of questions on our trade desk about it. We're getting questions across optimal blue, because this is basically it's a growing issue out there on things like LinkedIn. So you hear a lot of chatter there and elsewhere. You can't go to a conference right now in our industry and not have a panel that is focused on changes that have come and are coming to credit reporting. not the most, maybe not the most interesting subject on its face, but it actually, there actually is a lot of interesting stuff going on with credit reporting right now that's not super in the weeds even. It's kind of almost like an exercise or a lesson in economics, the way that it's being, the way it's playing out right now. So what we're talking about, you may have heard that there are changes that have come and are coming. for credit reporting, especially for mortgages. So just the backdrop, in case you're not familiar, FICO score is what we would call it, right? FICO stands for Fair Isaac Corporation that they've been kind of owning the credit reporting for mortgages for decades. So mortgages are priced, valued. Your ability to repay is based on what they're now calling classic FICO. because there's these new models now. So we're calling it Classic FICO, which is kind of old school, been around for decades. It's a tri-merge kind of situation, right? There's three credit bureaus that report on your credit, on any individual's credit. And you take those three scores that FICO runs an analysis on what comes from these credit reporting agencies. And then you basically pick the middle. If you have three scores, you pick the middle of those scores and that's your credit score for the purposes of getting a mortgage loan. So jump ahead, and this is where there's a bit of history that's been out there for quite a bit. Alex and I were just talking, right? This goes back to the credit crisis, right? The aftermath of the credit crisis. What happened there that kind of woke people up and said, maybe we should revolutionize or at least modernize or at least look into this credit scoring mechanism that we've been kind of just following without questioning it since I believe the early eighties. Alex Hebner (15:32) As you said, ⁓ in the wake of the global financial crisis, ⁓ politicians, those in Washington, DC, ⁓ really took a magnifying glass to everything in the mortgage industry. And credit reporting and FICO scores, credit scores themselves came under that microscope as did everything else. And what came out of those investigations, Jim Glennon (15:43) Mm-hmm. Alex Hebner (15:55) culminated in the Score Competition Act. know Tim Scott and another sender from Virginia co-sponsored it. It was passed in 2017 and essentially what it did was it codified the ability for the FHFA to approve or deny alternatives to the classic scoring model. this has been a very slow roll. They didn't get this act out until nine years after the crisis itself and here we are almost 10 years beginning to new models begin to be adopted here in the mortgage industry. You were talking about the classic FICO, that's the one that you said has been around late 80s, early 90s, I know it was deployed. If you've bought a house anytime in the last 30 years, that's what's been used to evaluate your credit worthiness, how big of a loan you can get. Since then and since that 2017 act was passed, Jim Glennon (16:41) Mm-hmm. Alex Hebner (16:48) seen advantage score be deployed. Now this ⁓ is another credit scoring model that is used on borrowers and it was co-created by those three credit reporting bureaus that you talked about. Experient, Equifax, and TransUnion are the three. And their model was approved by the FHFA couple years ago now ⁓ to be used alongside. Jim Glennon (17:03) Mm-hmm. Alex Hebner (17:12) classic FICO. So in theory for a conforming loan, you could utilize ⁓ either a classic FICO or the Vantage score. we've just seen a slow adoption ⁓ of that Vantage score as it's taken a little bit more market share in that credit reporting space where previously it was fair Isaac or nothing. Jim Glennon (17:34) Right. It has caught on a little bit, but there's still some hurdles to jump over. I think it's also worth noting that one of the reasons that everyone, a lot of folks in the industry, and then the current White House administration has been fairly vocal about the adoption of Vantage score is pricing. Right. A big thing was that FICO, because It was the only game in town was able to raise their price over time. Some would say significantly, some would even say maybe more than was reasonable to the point where it's not a major expense when originating a mortgage. costs between 8,000 and $12,000 to originate a loan. And a credit report costs between, I believe it's like 80 and $200. But nonetheless, that's a price that's gone from $5 to 10 to 50 to 100 over time. So the current administration got ahold of that. You also have very vocal people on LinkedIn, other folks, activists in the industry saying that something needs to be done about the cost, but also what we talked about earlier, just the fact that FICO has not been overhauled in many years. ⁓ like you said, enter Vantage score. Vantage score takes hold. A few hurdles there is, like there's not a lot of guidance yet from the FHFA. ⁓ or Fannie Mae or Freddie Mac on what to do with that score. how is it going to be used to qualify a borrower? And just as importantly, how is it going to be used to price that loan? Meaning how do you use it to establish an interest rate? Because right now you really only have Classic FICO to use the price alone. And because we have so much history of these credit scores, as you said, for the past 30 years, it's been used. Therefore pretty much every mortgage that's out there right now was originally scored using FICO. Therefore, we know the delinquency rates and the payment performance of all of these trillions of dollars of mortgages just purely based on FICO score. So that's one chicken and an egg kind of thing that I think the industry is going to have to deal with for a while is that there's this lack of history for vantage score, because it hasn't been around that long. It hasn't been especially for GSE loans and government loans and this sort of thing. Although there's been a handful of, FHA pools, for instance, that have used Vantage Score. So you have this competition that's starting to bruise. You have Vantage Score, you have Classic. So then FICO though also comes out with their own new version of credit scoring. Right? So you have FICO 10T, they call it. And that, as I understand it, works similarly to Vantage Score in a few ways. One, like it basically is meant to... address some of the, maybe not deficiencies, but some of the things that could be better about FICO, you know, having been developed 30, 40 years ago, obviously there's better technology now, there's better data. There's some things that are lacking in a classic credit score that are going to, that are being addressed by VantageScore and FICO score 10T, right? Some of those are trending for instance, like FICO score is just kind of a snapshot in time where Banage score and FICO 10 T look more at a person's credit over time. Are they trending worse in credit? You know, are they accumulating more debt? Are they missing payments over the past six to 18 months? Or are they getting better? Like that could be good for a borrower if their credit score is improving, but it's not quite to the, I don't know, levels yet. It will take that into account. So that's just a couple of things that are being addressed by these new credit scoring mechanisms. And I think the other one would be rent, right? Alex. Rent is, or other types of, they would call it thin credit. Some borrowers just don't have a ton of stuff on their credit report to evaluate them. So these new mechanisms bring in additional data that the current classic FICO score doesn't. Alex Hebner (21:39) Absolutely. Yeah, I there's two big changes to these new and improved credit models that improve upon that classic FICO. One, as you said, is that trend of data, it's no longer a snapshot in time. can show if you as a borrower have been improving or degrading in your borrowing habits and your ability to make payments on time. other is that there's a recognition that the economy has changed the last 30 And there's also, I think, a tacit admission that we want to expand. the pool of people who are able to be scored and achieve that American dream of owning a home. And so, like you said, they've opened the circle a bit of the items that make its way onto that report. ⁓ As you said, rent is one of those items. ⁓ So you can show that you're a responsible renter, that you make your payments on time. That goes a long way towards proving that you'd be able to. make your housing payments when it comes to a mortgage as well. Utilities are on there as well. And then there's also some exclusions in some of the models. There's the Vantage Score one, specifically excludes medical collections. Medical debt is major source of debt for Americans. And they've made the decision on that particular model to exclude that. Jim Glennon (22:55) Interesting. Yeah, that's always been kind of the exception to the rule, the medical bills, because at times just with kind of how screwed up our healthcare system is, you can end up in unavoidable debt from a medical bill. that's usually the one, if you can't afford it, that's the one you don't pay, right? You stay current on everything, your car, your house, your credit cards, but that's the one that was unexpected, I suppose, it could be huge. So lot of folks will let those lapse and sometimes rightfully so, because they're just, it's too large of a bill to pay. So it's interesting that they would exclude those because it doesn't necessarily mean that you're a poor credit recipient. It just means that you kind of got yourself in a tough situation for good reasons. Okay. So yeah, I mean, as far as, you know, what to think about if you are, if you're an originator, you likely already know about this saga. You're likely on LinkedIn, maybe even opining on this. You've seen the tweets from Pulte, the chairman of the FHFA coming out and saying, you know, the score is eligible for GSE delivery immediately. Right. That's what got, I think this really in the public eye. last year, because again, politically speaking, there's a lot of motivation to back the vantage score, becoming a major competitor to FICO for the pricing reason, for the quality, right? Just to create competition to force FICO and any other competitor that comes to just to create something that's better. So in that regard, I think it's a good thing. It's just, you know, when will we be able to actually price loans and use these new mechanisms? in our day-to-day lives as mortgage originators, as borrowers, as capital markets people, we don't know the answer to that yet. The adoption's there for things like pre-qualification. We've heard a lot of clients use it to pre-qualify a loan for loans that are in their portfolio, potentially meaning a loan they did years ago that they own they want to continue pulling credit on that, partially because of the score is less expensive, but also because it is a trended analysis so they can kind of get a better view into what the... how the borrower is performing. So the next step is just going to be the GSEs and investors. So investors meaning big banks that buy mortgage loans, having them publish pricing that's for advantage score and possibly for FICO 10T so that those two models then can move forth. And eventually I think the plan would be for FICO to eliminate or retire classic FICO because they're also working on some even newer models than FICO 10T for other types of. of mortgage loans. Alex Hebner (25:44) agree with all those statements. think we'll see here in maybe in the five to 10 year time span, we'll see a pretty healthy ecosystem of two coexisting FICO scores. But I do think right now, as you said, the big barriers are on the investor, the street side of getting enough data to say, to accurately be able to price those vantage scores as they retain more and more of those. Jim Glennon (26:08) Right. And I guess, you know, one thing I would note that has not been addressed by either of these new models that's always bugged me, even looking at my own credit or when I was on the origination side of the business is if you've ever noticed, if you've ever had your credit pulled and you get three scores, they could be very different from one another. Right. So whether you're Vantage or FICO 10T right now, they're still getting their credit scores from the credit reporting agencies, as you mentioned, the three different agencies. And somehow those, those three bureaus are supposed to have the same scoring model, generally speaking, but they don't always have the same data. Meaning you could have 10 trade lines, a trade line would be like a credit card mortgage, a car loan. You could have 10 trade lines with one reporter and then seven with another and 12 with the third. And those are going to be at various points of maturity and you have different balances on those. So you can have a credit score of 740, 760, and then like 720. And to me, that's frustrating. That feels like something that should be addressed at some point. If the data is just bad, what's, how is that model, that model's going to be, the model could be better. Let's put it that way. If the inputs were, were cleaned up. Anyway, I didn't want to rant about that, but I did want to mention it because it is kind of an important point that. should be one of the things that I feel that should get addressed here at some point to really fine tune the quality of these reports is having all of the trade lines that are available in the reports. All right. So yeah, I mean, if you're curious, definitely go out and read more about this. Copilot will give you a good, know, or whatever AI machine you use will give you a good view into this. Cause it is kind of everywhere. LinkedIn has some pretty good, about it as well, but otherwise just, if you're in our industry, keep, keep watching. think later this year, I would expect the GSEs to make some sort of announcement about how to price these, but that's going to be. That's going to be a whole nother can of worms that we'll have to open and deal with because it's still not clear if I'm an originator, if I have to pick a lane, like I'm a vantage score shop or I'm a FICO 10T shop or I'm a classic, or am I going to pull all three for every loan upfront? You know, some folks are already doing that just to kind of test the waters, what does the vantage score look like versus classic? That doesn't address the cost issue. That would make it more expensive. but it could give you the opportunity to pull three different styles of credit and therefore pick the best one to give the borrower the best rate. That could be good for the borrower. In fact, with a rate that's lower, that could arguably more than make up the cost of what a credit report costs the borrower. that, you know, maybe the argument is there that you pull all three and you find the highest one. Anyway, more to come. We really don't know a ton other than what we've just told you and the internet won't tell you a whole lot more, but. I do expect news on this and when that news comes out, we'll certainly talk about it again on the podcast. Alex Hebner (29:17) Absolutely, absolutely. Yeah, the mortgage industry is kind of late to the party when it comes to these. You you see much wider adoption of the newer models other credit spaces, whether it's auto lending credit cards and such. to come for sure. Jim Glennon (29:32) Yeah. I they're clearly better. There's clearly an improvement. It's just a it's a big boat that we have to turn around in the mortgage industry. think there's so much, there's so many vintages of loans that were scored against scored on classic FICO that they know what that performance looks like. Even if that's not the best way to score today, it was the only thing for the past 30 years. So that's what, that's the history. That's the historical data we have to work with. So just making that jump, making that transition to these newer models is going to be. Alex Hebner (29:40) Yes. Jim Glennon (30:03) It has its nuances, especially for the largest credit industry in the world. Alex Hebner (30:10) Absolutely, a lot of plumbing to be reworked. Jim Glennon (30:13) Definitely. All right, Alex, great discussion, man. Appreciate you. Talk again soon. Alex Hebner (30:19) Appreciate it, Jim. Thank you. Jim Glennon (30:21) Okay, let's wrap this thing up. Thanks so much, Alex. Thank you, James. That's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.

Optimal Blue (00:02) Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Welcome everybody. A lot to talk about today. We've got a great show, as always, in the interest of making sure you know what to watch. Whether you're an originator, a capital markets person, or just someone interested in the mortgage industry and some great market commentary, we're going to do a, just a kind of a big market update today. We don't have any kind of special segment. We're just going to get right into it. We're going to talk about the Fed meeting last week. We're going to get into geopolitics quite a bit today too. That's really right now what's driving interest rates is what's going on over in the Middle East. So before we get to the market update, again, back to rates, OBMMI much higher. this week, 6.4. So we've come from the five handle to half a point higher, roughly at 6.4 throughout this still relatively short conflict in the Middle East. The 10 year is at 4.4. So again, up about half a point from some of the lows that we saw earlier this year. Just rates don't like this sort of conflict, especially as it relates to oil prices and general inflation expectations. We'll get into that quite a bit here in a couple of minutes. Let's go check in with James and Alex, let's do the market update. Jim Glennon (01:46) Welcome Alex and James. Thank you for being here. Good to be back for me after a week off. we got an extended market update for everybody today. Probably good timing. There is a bit to talk about. Not a lot of different subjects to talk about, but a lot within a few subjects, I would say. Why don't we just start with what's already done and on paper. We had the FOMC. meeting last week and the announcement on Wednesday as usual, no rate change, but a lot happening with the Fed right now, right? We potentially have Powell on his way out. This may have been his last official meeting as the chairperson. some words on his way out the door. don't know, Alex, you were talking about this a little bit earlier. What'd you make of the Fed presser after the announcement on Wednesday? Alex Hebner (02:39) Yeah, no, like you said, no rate cut as expected out of this FOMC meeting, even pre Iran conflict. This one was expected to, hold rates steady. You know, looking out over the year, we've seen any chance for rate cut evaporate as this conflict has evolved. yeah, I was, was kind of noting during Powell's presser, kind of made an admission that I think he has been kind of kicking the can on in his, his other pressers. prior to this, where he kind of, the words he used were, we haven't made the progress that we would have liked to on inflation. I do find it kind of funny that he says this kind of, as he's walking out the door officially, this was his last official meeting, it very well might be his last meeting, yet to see if Warsh gets confirmed in time to take place on schedule. But yeah, he said, we haven't made the progress we'd like to see on inflation. I think this kind of, Jim Glennon (03:15) Right. Alex Hebner (03:30) re anchors the conversations are in the the Fed around inflation, starting to tackle that two point something inflation rate that we've been seeing the last few years. You know, I think the markets been very complicit and fine seeing that two point something inflation readings so long as everything else is going all right, you know, jobs haven't been great, but they haven't been terrible. You know, equities have been continuing to outperform. Jim Glennon (03:39) Mm-hmm. Alex Hebner (03:58) economy hasn't taken a real beating, so to say. And so they've been okay letting inflation run a little bit hot. before we started recording, kind of, know, pals, maybe the babysitter who's walking out the door and like, you know, hey, by the way, the stove's on. know, depending on your inflation outlook, yeah, it's somewhere between a small fire and I just forgot to turn the stove So yeah, I think it Jim Glennon (04:11) ⁓ There's a small fire burning in the kitchen. Good night. Alex Hebner (04:24) at least sets the stage for his successor or him, maybe later in the year here to reorient the conversation towards inflation. And I think evolution of events that we've seen in the energy space and geopolitically will lend themselves to making that conversation one that we need to highlight. Jim Glennon (04:42) Yeah. mean, inflation, once again, like you said in the spotlight and we've been hanging on this precipice for the last two years. feels like this two point something, which we've never been able to get to that, you 1.7 to 2.2, which is kind of where the fed on paper likes to see inflation. And as we've been able to accomplish that for many years before the, kind of the excesses of COVID and, know, between policy and of the fed and policy of the white house, just rampant, you know, nine, 10 % inflation, but just can't get off that. cliff, and then now we're heading into, let's just finish up on the fed, right? No official word yet. If charges are going to be dropped against chairman Powell, therefore, Warsh may not be confirmed in the near future. So there's two scenarios, right? Either Powell continues as the fed chairman or Warsh comes in, or there could be a third candidate, I suppose, if Warsh is knocked down for other reasons. So whoever steps into this thing is going to step into a into a bit of a vat of, well, I was gonna use the vat of boiling oil, if you will. And then on top of that, then you have the war in Iran, right? Or the war launched against Iran. That's now become a broader conflict in that whole region. think everybody's aware of it at this point, but it's, it's sent oil prices surging, which has a direct effect and an indirect effect on inflation, right? Everything things are made from petroleum, first of all, but also things get to where you are to buy them by way of. gas or diesel or whatever, right? Whether they come on a plane or a boat or a train. just starting to feel that panic again, and that's driving rates up as well, right? We're close to 4.4 on the 10 year today, which is about a half point higher than anybody would like to see and higher than some of the lows that we've seen also pushing mortgage rates up, which our industry doesn't like to see. So what's the, I guess this morning, like, There's been a little bit of a change. James, I think you were reading about this today. It's still a little bit up in the air. President Trump came out this morning and said, hold on, you know, after the kind of a market meltdown on Friday, hold on, going to, we're having suddenly progressive talks with the Iranians. We're trying to make a deal. We're going to hold, we're going to pause on bombing for a moment. James Cahill (07:07) Yeah, you know, as we've kind of covered, so it should take four weeks before all the oil reserves, you know, coming out if it totally stops are halted. And then we have strategic reserves and other countries have their own. We start digging into that. And so there is time, but it takes four to six weeks to get everything back online. And so we're entering the fourth week of this war. So there is a real turning point here over the next, you know, five or so days. I saw a number of articles that were talking about, if we make this into the first week of April, third world countries are going to be without oil. They will be running out of energy. You'll see what's going on in Cuba. You will see in other places. And that's when lot of Europe too is going to start being squeezed a lot. The Trump administration came out this morning and said that, instead of bombing, the energy infrastructure in the next 24 or so hours, they're going to give Iran five more days because there's been some progressive talks. Sounds like everyone wants to make a deal, settle things out, which that would be great if we could, you know, land this plane in the next week, you know, five days, get oil coming through again, then we could probably avoid the worst of what could come. You know, everyone's already seen like $4 at the gas station, but we could avoid seeing six, seven. Jim Glennon (08:25) Mm-hmm. James Cahill (08:28) But I did also see that some Iranian officials came out this morning and said, we have not been having direct talks. there's a little bit of a, you know, I'm sure they have, they don't, they have to save face and no one wants to admit that as the underdog that you might be bowing a little bit, but it's not, ⁓ it's not, the market was rallying this morning. That news came out and it started to slide back a bit. So everyone's tempering their expectations. Jim Glennon (08:36) Yeah. Yeah, you would think it would be in their best interest to say that surprised us, but let's yes, let's sit down. Let's let's talk. ⁓ Yeah. So yeah, it's it's it is disturbing to think that this could really turn into ⁓ a bigger humanitarian crisis. And we, know, versus just releasing oil from certain reserves to lower prices a little bit. A lot of these countries, as you mentioned, third world countries, even Europe, they don't have a ton of reserves like they will have to make. James Cahill (09:04) Yeah, we sure have. Yeah, sounds great. Jim Glennon (09:28) difficult choices because they're not producing and they don't have, they have nothing like on hand to start producing gasoline and other products that come to other fuel products that come through the Straits and that are maybe dependent upon some of the ports that have been bombed by the Iranians. yeah, hopefully the words that Trump put out this morning are real and we're really moving towards something. Cause as you said, you can start getting into April, then it becomes a bigger. crisis and I think we see rates go higher from here. A lot of folks will tell you that, you know, 4.4 on the 10 years, a pretty critical level. we go higher from there, it's kind of a, it's a follow the money moment as we've talked about a lot on this podcast, right? If you see interest rates moving a certain way or equities moving a certain way, there's probably going to be geopolitical decisions that are going to be made based on that. It's not just suspicious. It's likely that The president came out this morning and said, we're starting to make progress because of the meltdown in the market on Friday. They kind of capped off three weeks of, of the market digesting what's happening in Iran. We, we said a few weeks ago, it was going to take a few weeks for the markets to figure it out and they seem to have gotten I don't know. I guess it's just continue to follow the money right now and hope that we don't, you we don't blow through $150 a barrel and four and a half on the 10 year. Otherwise, what does it take to tamp that back down and bring oil back online and all this if we get into April and May? James Cahill (10:57) ⁓ Alex and I were kind of kicking this around before the call, but you know, the United States is the next exporter of oil. So we have enough to pay for ourselves and then actually send it out. And so if things got particularly bad, well, we could keep some more of that for ourselves and try and keep the gas prices a little down. Now, as a global commodity, it's a little diff, you would need an executive order or something to say, you actually can't sell this much abroad, something to stop it. Otherwise you do just have global market price on oil, but you could separate the two. But the kind of issue with that is if you're slowing that down, now Europe can't get that American oil, know, hey, well, they have all these treasury bonds and maybe they need some liquid cash right now to pay for extra oil. And you know, maybe United States, shouldn't do that. And so there's a... ⁓ Jim Glennon (11:41) Mm-hmm. James Cahill (11:51) There's a tango that we are stuck in with our allies. Jim Glennon (11:56) That's an interesting one too. So folks may have to liquidate American assets to buy American oil, which would send rates higher potentially given that roughly a quarter of US treasuries are owned outside the US. So again, following the money. James Cahill (12:14) especially largely Japan who is they will run out of oil. I think it's like an eight week reserve. So Jim Glennon (12:18) Mm-hmm. Alex Hebner (12:23) And keep in mind, mean, it's the petrodollar system. It's not just American oil coming from West Texas that needs to be bought in dollars. Any oil, mean, BRICS would love to change that. you know, by and large, if you're buying oil coming out of the Middle East, isn't embargoed Iranian oil. If you're buying Saudi Arabian oil, you also need US dollars for that. That's why the US dollar has performed so strongly over the past three weeks. There's been a rush for dollars, even if we're even just consuming the same amount of oil. you know, price per barrel went up 20, 30 bucks. Jim Glennon (12:30) You Mm-hmm. Alex Hebner (12:52) you need 20, 30 more dollars, US dollars per barrel to purchase that. Jim Glennon (12:56) Right. So that pushes the dollar up, which I don't know, could potentially be a good thing, but it can be difficult for, Oh, other pieces of the trade balance. Alex Hebner (13:06) Yeah, as with all these things, you pull on one string and you watch 12 different things move. But no, no, James is, I think, dead on the head. The US will be insulated because we have an abundance of natural resources. We are currently a net exporter of fossil fuels, but our European allies will absolutely feel the pain from this. And as he said, they could make us feel some of that squeeze as well in the Treasury markets. Jim Glennon (13:11) Right. Right. mean, and speaking of our European allies, it's probably also worth noting that maybe in an effort to release the chokehold on oil a little bit or to lower prices, we also announced that we were de-embargoing Russian oil and oil from some other countries where we had previously, the BRICS mostly, where we had previously been holding restrictions on that. We basically lifted those, which I don't think the Europeans would be too happy about, especially given the war that's going on still in the Ukraine. Alex Hebner (14:02) Yeah, absolutely. There were three big announcements last week that were all intended to kind of calm the global energy markets. The two you mentioned there, Russian oil that is at sea currently, so already on a ship, was de-embargoed in addition to Iranian oil that's already on a ship. And I believe it's a 30-day waiver for both, so you have a month where you can buy that without getting cut off from the US financial system. The third one was Trump waived the Jones Act, which is essentially this act states that it... Jim Glennon (14:23) Mm-hmm. Alex Hebner (14:30) Anything transited between two US ports has to be on a US flagged ship that is manned by US personnel. So just another one that if you needed to, a particular tanker that has a Thai crew or something, it's owned by a Greek shipping magnet or something that could transit. Again, it just opens up the possibilities of the ships that can transit between US ports. Jim Glennon (14:52) Right. So it seems like we're doing everything we can policy wise to keep oil prices down. But as long as the Iranians keep pounding the Strait of Hormuz, which is where more than half of all the world's oil goes through, there's not going to be an end to this kind of scary stalemate until there's some real diplomacy that goes on or somehow the US and its allies. take control of that strait somehow, that's another, you know, can see a lot of videos online about how that could be possible, how that could get done. it involves boots on the ground, which I don't think anybody wants to see. It would involve literally people along the shorelines armed, holding back these attacks that have been going on and attacking some of these ships that are potentially laying mines throughout the, throughout the strait. Wild times. All right, what else on this gentleman? Alex Hebner (15:55) think that kind of covers the development of the last At the end of the day, I think my final statement would just be, we're not going to get back to where we were at the end of February for a good chunk of time now, even if I said this on the last couple of podcasts, but even if we get a peace agreement with strong enforcement mechanisms in place right now, it's going to take at least a month to turn on. refineries and get things pumping again. And in addition to that, over the course of the last week, Iran has scored some hits on some pretty key infrastructure throughout the Gulf. And I know a Qatar energy facility, this one is their natural gas, but they were saying that the repairs on that could take upward of a year and those repairs really can't stop until the bombs stop falling. going to be long, long lag times on a lot of this stuff. But at the end of the day, peace is the only way we're gonna get through to lower rates again. Jim Glennon (16:49) Right. So safe to say there's some inflationary pressure that's going to continue from not just the initial delays of oil and fuels getting through the Middle East, but now all the damage that's been done rebuilding that, bringing factories back online or replacing or moving that production somewhere else. Alex Hebner (17:06) Yep. James Cahill (17:07) I've definitely heard the analysis of, you know, kind of a game theory with this. At a certain point, you know, Iran bombs Qatar, the Emirates, their oil. So you no longer have those facilities. It's going to take longer to rebuild them. The United States, Israel might bomb Iran's back. But once those are gone, that's a sunk cost, right? Like right now, there's a reason to sue for peace. It's, hey, I can sell this oil. once those, once that infrastructure is destroyed, Might as well keep going, right? You're, there's no backing out. You've lost what you had. So I think that that is a lot of, and the conversation today that, we were going to bomb Iran's power grid and then, we're going to them a few more days. It's a bit of a nuclear option here is, Hey, we might, you know, really hit the oil fields and put you in a decade long tough spot. That's a, it's a dangerous, ⁓ escalation. Jim Glennon (17:39) Interesting. Mm-hmm. James Cahill (18:05) but it does seem to be based on the word of the administration trending in the right direction. Jim Glennon (18:13) Yeah. So you're saying the game theory folks would say, presumably this five day negotiation either leads to some form of de-escalation or we as the U S and Israel have, as we have less and less to lose from our allies in that region, like we'll just bomb them back into the stone age in response because we have nothing. They've already blown everything up that we want over there. that the? James Cahill (18:33) it I'd say more so the other way is, you hey, we have the opportunity to keep escalating. once we, know, cargo island, we bombed all the military assets on it, but we didn't blow up the oil there, ⁓ or the storage, right? But those are still targets. And if they start going after stuff like that, then Iran loses, why would they sue for peace? You know, what it's going to take them a decade to rebuild all of this anyways, you know, Jim Glennon (18:44) I see. James Cahill (19:09) all of your precious infrastructure is gone, why would you quit early? Jim Glennon (19:15) Right. Okay. So Iran has a little bit left to lose at this point. And that's what we're going to threaten. We already are publicly threatening. James Cahill (19:24) That's how I put it, yeah. Jim Glennon (19:25) All right. Yeah. All right. Well, like we said, everybody, keep this is something that's going to develop throughout today. So by the time this podcast comes out, comes out, we're likely going to be in the same spot, but continue watching throughout this week. If we get any major news, we'll probably have a bonus podcast, but otherwise, you know, be watching for some sort of deescalation this week. Otherwise we go into April and we probably see higher inflation. We probably see higher rates and this was probably a protracted. conflict as many had feared. All right. Anything else to look out for this week, gentlemen? Just the usual numbers, right? We've got jobless claims coming out later in the week. Alex Hebner (20:09) Yeah, yeah, we'll get ⁓ our usual weekly Douglas claims on Thursday. And believe there's a couple of speaking engagements. know Myron's speaking, was it today? believe it's today Myron is speaking in addition to Goals B throughout the week. I believe there's one more on Friday. yeah, I mean, I am with you, Jim, think. Continue to monitor those geopolitical headlines. I think if anything, the Fed speakers will addressing some questions on the geopolitical headlines. So you can kind of get some insight there, but at the end of the day, the market and the race that you're seeing are going to be determined by what's going on abroad right now. Jim Glennon (20:38) Mm-hmm. Yeah, worth noting that Myron still voted for a cut last week, which he may be asked to explain the reasoning there, right? Because he thinks that we're going to see a, I don't know, somehow better inflation numbers going into the second quarter. Good. James Cahill (20:59) Only other item is consumer sentiment this week. ⁓ And we were kicking this back and forth before we hopped on, but that survey was taken before the war started, but probably unchanged then around mid fifties. Jim Glennon (21:16) Mm-hmm. Right. So barely over 50, which is kind of the inflection point, right? And that was just before the war started. So likely, even if we see the expectation of 54, 55, the next print that'll come out in late April may not be as to what's going on right now. think just because of gasoline, gasoline does drive a lot of consumer sentiment. It's just one of those things that you can look at in any neighborhood or municipality and people can point at it and say don't like the way things are going because I just feel it when I fill up my automobile or you my truck. All right. Good update today, gentlemen. As always, we'll keep an eye on everything for you out there. And yeah, like I said, we may hold a special episode here midweek if anything develops. Otherwise we will talk to you next week. Thanks fellas. Optimal Blue (22:11) All right, great update today. Thank you, Alex. Thank you, James. That's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning in to Optimal Insights.

Jim Glennon_Intro (00:18) Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Welcome everybody. Thanks as always for being here. We have a wonderful show for you today. Whether you are an originator, a capital markets person, or just someone interested in good mortgage industry information or just great market commentary, you're in the right place. We'll talk with James and Alex here in a minute. We'll do a little bit of a market update. And then after that, we had an interview with the brilliant Seever, our CTO and fellow innovator at Optimal Blue. We'll talk a little bit about AI, machine learning, and may even have a surprise or two in there that we'll be able to show you here in a few minutes. But first, let's go check in with James and Alex and see what's going on in the market. Alex Hebner (01:14) Good morning, everyone. You got Alex and James here coming at you live on this ⁓ Monday, March 16th morning, St. Patrick's Day Eve. I James is ⁓ repping with a shamrock on the hat today. How you doing, James? James Cahill (01:29) Yeah, pretty good. Happy St. Patrick's Day. know, between that and sinners kind of cleaning up at the Oscars last night, I was feeling, I feeling some representation. Alex Hebner (01:38) Yeah, nice, saw, yeah, zero for nine for Marty Supreme I saw, so. James Cahill (01:43) Yeah, you know, it was pretty solid movie. It's too bad he put his foot in his mouth. Alex Hebner (01:45) It was, yeah, there were some good ones this year. liked, liked Begonia personally. I actually have not seen centers, so I gotta carve out some time to go see that. James Cahill (01:56) Solid, solid, you'll enjoy. Alex Hebner (01:58) Yeah, the Academy agrees with you. James Cahill (02:00) Hahaha. Alex Hebner (02:03) We'll jump right into it here with our econ update before cutting over to Jim and our CTO, Seever, who are discussing the landscape of AI currently. But just looking at the economic front, as a recap for last week, we got a PCE number. This was before all the geopolitical developments that have taken place over the last three weeks, RE the Iran War. PCE came in for February around expectations about 0.4 % month over month. PCE is the Fed's preferred inflation metric. Sorry, I misspoke. This PCE number was for January. I would have thought it was for February, but it's for January because of the few-day government shutdown that we saw at the beginning of the year. We saw that gasoline energy prices, in addition to motor and vehicle parts, were the numbers that helped keep PCE this time around in check. That's something to definitely keep an eye on because I think we can expect in the coming releases, not the February release, but definitely the March PC number that that energy cost will swing to the other side and act as an anchor to the upside for your inflation expectations. then I think the other big number that we saw last week was in the GDP revision for Q4. That number initially came out at 1.5%, but was halved down to 0.7%. We saw a smaller rate of growth in the economy to close out 2025, which on top of the geopolitical landscape, rates rise and equities sell off throughout last week. Taking a turn towards the DC circuit, there are two competing bills currently, one in the House, one in the Senate that are of note to anyone in the housing industry. Right now, I believe it's the leading bill in contention is the road all caps. to Housing Act right here. They're just looking to expand the housing supply through a number of avenues. I think there's 40 plus different provisions attempting to get the housing supply into the hands of homeowners. Right now, the biggest point of contention is around institutional investors and how big of a share of the housing market they'll be allowed to hang on to. Right now, I think the biggest concern is around for those that are considered large investors, those that hold 350 or more properties, they'll be required to sell those properties off over the course of within seven years of acquiring them. Is that correct, James? James Cahill (04:35) Yeah, and I think it's good to finally get a little clarity on this one. Trump initially said he was gonna sign an executive order, try and get this through. People were raising questions like, well, no investment properties at all. Does that mean you can't have something that you're renting out in Airbnb where you have two houses, but you're not there? It's in Colorado or whatever, so you let people go skiing, rent it out at times. ⁓ It is no hey, this is for and not just large investors people who have a hundred plus. This is super large 350 houses plus so I think from my Perspective I think that this makes sense. It's going to be difficult to get it through both the house and the Senate This is definitely the sticking point But it's something that you know, you people go back and forth on well There aren't really that many of these properties owned in the United States, but it is about 10 % of housing is wrapped up by private equity firms or owners. That is on average. can find places, Georgia, there's a couple of cities that have 25, 26, 27 % of the housing is owned. That's an enormous portion. is, you know, they're definitely making an impact on who actually can and can't be a buyer there. So even if they were just frozen out, that would make an them. will definitely make an impact. But then, you know, are they gonna sell them at a little bit of a depressed price? Is it going to slow down if they're not allowed to buy? Well, will the housing builds in that area be at the same rates or would it be slowed? So there's a lot of second order effects here, but I like the initiative. Alex Hebner (06:18) Agreed, agreed. Yeah, no, yeah. The forced to sell within seven years could, ⁓ you know, being forced to sell at that seven year mark, who knows where the housing market could be at that juncture. And it could definitely create, like you said, some second order effects and actually depress a housing market, especially in some of these areas where they have a pretty big hand on the scale in regards to that, that local housing market, like you said, in maybe the Atlanta suburbs or North Carolina, throughout the Sunbelt, I know is where private equity's snatched up the most homes. So we'll continue to see how that bill continues to evolve. It's got to go to the House. The House has one that they're also currently debating. I think the short of it though is that Trump has signaled that he was likely to veto anything that doesn't include some sort of provision around institutional investors. So we'll just have to see what the heads in Congress, when they put their heads together, what they're able to put together. Outside of that, like I mentioned, there's 40 plus provisions for increasing housing and getting more homes built, whether that's just making it easier to build, slashing some of that red tape. I've seen definitely some of the provisions are kind of encroaching more on historically what have been considered wetlands or river flood zones. then in addition to that, just ADUs, accessory dwelling units, kind of the grandmother's house out back in. you know, parlance, just being able to have a rental unit on your property that you own. So we'll keep an eye on that. think that would have massive implications when it does pass. And it will pass in some form. This passed the Senate 89 to 10, I believe. So bipartisan approval across the board. addition to that, on the political circuit, ⁓ Friday, kind of snuck under the radar, Trump signed two executive orders on Friday. targeting affordable home construction and the other was promoting access to mortgage credit. The affordable home construction quite a bit of overlap with what's currently being debated in Congress. And then promoting access to mortgage credit, just much more so they seem to be focused on getting smaller community banks into the lending space. And that was what that executive order was focused on. ⁓ James Cahill (08:22) first one there kind of leans into what you were saying, right? I was reading through that too. And it was, you know, hey, the EPA needs to relook at their rules around wetlands and whether or not you can build on them. So can we relax a little bit of regulation red tape and actually get building started quicker? The second promoting access to mortgage credit, I think we're actually about to dip into it's a little bit more of a deregulation move, right? It's kind of rolling back some of the truth and lending act, trying to make it a little looser. so that it's easier to get originations through. Alex Hebner (08:57) Absolutely. Yep. That feeds perfectly into the next point that I want to talk about today, which is just bank deregulation. Michelle Bowman's kind of heading this up from the Federal Reserve Board. And this will be voted on this coming week with additional input still to come from focus groups and ⁓ groups that have interest in this space. But essentially what they're doing, or what they're looking to do is have roll back the capital requirements that banks must hold on different classes of assets back to 2019 levels. And this would do is to expand the pool of capital that's available to be be lent out. Wall Street's been pushing to overturn post GFC. regulations for years now, several decades, really, really, since they were put into place in the wake of the financial crisis. And as I said, this will only really pull back these regulations to two levels that were in place pre-COVID. mentioned a couple of times here, but I think what's continuing to drive the market and all the headlines that you're seeing day to day just revolves around the war between the US, Israel, and Iran and the straight-up Hormuz where 20 % of the world's oil and natural gas flows through. We've seen the price of a barrel of WTI crude. That's the sweet crude that is pumped here in the United States that has increased by over 50 % since the war began from around $60 a barrel before the strikes began to north of $100 a barrel, settling around $95 a barrel at time of recording today. Seen a little bit of a give back there in the energy markets. You know, there doesn't seem to really be an end in sight to the conflict and, know, the main point of contention here being at least for the markets around the straight forward moves and getting energy flowing again. I think that the main concern for you, you know, as a mortgage professional is just keeping an eye on what this is going to do to push inflation expectations up. You know, we've seen before the strikes, we were expecting two rate cuts from the FOMC this year. and those have completely evaporated. We're expected to hold rates through 2026 where they currently are. And then, ⁓ you know, just on the back of an expectation that the cost of energy will push inflation probably north 3%. We've been in that 2.5 to 2.9 something range for 12 months now. Goldman Sachs sees each sustained $10 increase in cost per barrel, adding about five basis points to the core CPI reading. So where we currently are, we'd probably add about 15 to 20 basis points to the CPI reading, which would push us to right around 3%, if not just above. James Cahill (11:49) it's a little relational into tariffs that this would be more of a one-time shock. We would see the hit if it actually goes up $10 a barrel somewhere in the 90s, maybe even $100 a barrel for a long time here. That's the five basis points that you're seeing push us into 3 % inflation. But at some point, this would hopefully all be resolved and you would expect pricing to come back down. there is, you know, the big threat is if things continue to escalate, if a lot of that, not just the straight stays closed, but a lot of the infrastructure to get the oil out of the ground or transport at all is destroyed, that would be a longer term shock. It would be much more difficult to actually get everything moving again. And so that's really kind of the fear that's been stoked. Alex Hebner (12:41) Absolutely, absolutely. Solving the conflict is just step one to getting global energy markets back into balance. The next step is then for all these refineries and the pumping stations to be turned back on, which has weeks of lead time. And if this conflict continues to drag out, there could be second order effects to where different countries source their inputs for oil, which... when a country is building out their energy infrastructure, they're targeting a certain grade of crude oil. In the US, it's sulfur light, the oil that's coming out of the ground in the Middle East typically has a higher sulfur concentration, which all the refineries for these countries that buy this are built around. Yes, yeah. James Cahill (13:30) You need to have specific equipment to work with. You can't just, what's coming out of the ground in Venezuela and coming out of the ground over in Saudi Arabia or even the United States are not the same oil. And so you need different material and different equipment. So you can't just shop it around as easily. Alex Hebner (13:46) Exactly, exactly. ⁓ We're not quite to that point yet in regards to the energy shock, but that could be if this conflict were to become a years long conflict, we would see those kind of pain points arise. So just continue to keep an eye on geopolitics and see if it continues to escalate. It does seem to have tapered off at the moment. At least that's what the energy markets are saying as of this morning, but that is changing by the hour, by the minute. Just looking forward towards this week, again, I think geopolitics is going to continue to capture the headlines, but we will get a PPI reading. That'll be our last inflation reading for the month. The goods and services have been swapping off kind of month to month as to which one is creating inflationary pressures and which ones are seemed to disinflationary. Right now it's expected to come in right around where it's been at 0.3 % month over month for the core, 2.9 % year over year. Again, this will be a pre-Aran War reading as well. So I would expect it to fall near those expectations. Then finally, we have Powell's final FOMC meeting that will also be taking place this Wednesday. As we already touched upon, there's no expectation for a rate cut. James Cahill (15:03) Yeah, and I think I like your note there because it's his last meeting, but Tillis is still blocking Warsh's nomination. So there's not a clear succession yet, technically speaking in prior years. This is not the first time in US history that there was not an approved member to take the place of the Fed chair. Generally what happens is the sitting chair remains in charge. It's not a written rule anywhere, so there will probably be some administrative pressure back in the news to try and figure out what exactly we're going to do here. Who you know? Does Powell actually get to stay and sit or does it just fall to someone else? You know, is there a way to force wash through so I would expect to see some headlines in next couple of weeks coming back around to this because. the Fed is going to be critically important, especially now with inflation potentially back on the table due to the oil shock. Alex Hebner (16:05) Absolutely, absolutely. think yes, I think it's very pertinent to caveat that with an asterisk. It's his last official FOMC meeting. There's a chance that he continues to carry on his duties beyond his, I believe it's May 15th. is again, asterisk final day. Yes, we'll continue to keep an eye on that. I know last week a judge kind of rolled in in pal's favor in regards to the ongoing ⁓ criminal allegations in regards to the FOMC's. ⁓ James Cahill (16:12) Yeah. official last day. Alex Hebner (16:33) redoing of the Eccles building and adjacent auxiliary campuses. We'll continue to see again how the Trump administration's efforts to prosecute him continue to evolve over the next two months here. James Cahill (16:47) Something to look forward to. Alex Hebner (16:49) Some look forward to it. Perfect. I know that was a lot of information. We were blessed by the news this week in regards to content. with all that being said, we will hand it over here to Jim and Seever who are walking through some AI and how we're using it here at Osmo Blue and in the mortgage industry. Thanks, James. James Cahill (17:11) Thank you. Jim Glennon_Guest Seg (17:12) All right, welcome Seever. Seever is Optimal Blues CTO and long time friend and coworker of mine. Welcome Seever thanks for being here. Seever Sulaiman (17:23) Thank you, Jim. Good to be here. Jim Glennon_Guest Seg (17:26) We wanted to have Seever on today. It's been a while. We talk tons about AI on this podcast, right? You can't go anywhere in the industry, even in the world without hearing or talking about AI. We've had some of our own experts on the podcast. We've had third parties come on to talk. And of course you hear Alex, James, I, Kevin go off on tangents about AI almost every week. But I wanted to bring you back in Seever just to kind of level set us. feels like... Seever Sulaiman (17:47) Yeah, of course. Jim Glennon_Guest Seg (17:53) We're in the very early stages of AI implementation across the world, certainly in the US, certainly in the mortgage industry, but it feels like we're seeing some benefits from it at this point. Where do you feel like we're seeing the biggest and most immediate benefits of AI in the industry, but also inside of Optimal Blue? Seever Sulaiman (18:14) Yeah, for sure, Jim. And it's actually, mentioned that you talk about AI all the time. One of my team members during the Optimal Blue Summit last week, they counted the number of times AI was mentioned. and Gen. AI during all the conversations and the speeches, not just from Optimal Blue employees, but also from all of our guest speakers, the panels. It was something like 624. And it was just like the most mentioned word. Jim Glennon_Guest Seg (18:39) Mm-hmm. Seever Sulaiman (18:43) more than any other sort of unique individual world, word in the entire summit. was pretty interesting. But I think when it comes to, um, the utilization of AI, I do want to differentiate between, and we've talked about this last time, right? Between GenAI and AI. know we will touch on this a little bit more, but specific to generative AI, which as we know is used for completions, for language processing, et cetera. There's really different layers where it's being utilized. Obviously in productivity, as you know, where we are and many in the industry or some in the industry are using it for productivity, whether that is just employee efficiency, if you're using things like Office 365 Copilot or what is more complex in sort of coding tools, coding, testing. I mean, software coding, right, development. So that's really one layer where you see some of the organizations talk about how they're generative AI in code assistant. The other one is really in the products, right, in the workflow. How do you help your customers, the mortgage lenders, the partners, the brokers, in their workflow and in their processes by... deploying what we're calling AI assistants or AI agents. And these are GenAI agents that go in. And as you know, we have so far more than 12 of those, like the profitability assistant, the position assistant, obviously the Ask OB agent, the originator assistant. All those are features or products that we have delivered in the market that help customers with their individual Jim Glennon_Guest Seg (20:11) Mm-hmm. Mm-hmm. Seever Sulaiman (20:36) processes and workflows. Originator Assistant, for example, helps loan officers find better rates for their customers or the borrower. So to answer your question in really one sentence, it's kind of being used in multiple layers. most that you hear about is encoding in software development. And I think we are seeing more and more companies like us implement Genactive AI as agents to help. our customers, the lenders, the brokers, do their work more efficiently. Jim Glennon_Guest Seg (21:12) Right. So on one hand, you've got, you know, we hear it from some of the software companies already, even though there might be a little bit of noise around whether they're laying people off to right size or to try to utilize AI just to become more productive, which is what I believe we've done at OB, which is to just be able to move faster, right? By having these AI tools help us code, but we're also deploying then tools for our customers, like you said, which is whether it's... Seever Sulaiman (21:37) That's exactly right. And you know, as far as, mean, what a lot of people talk about sort of layoffs and unemployment rates related to gen AI, to sort of what we're doing, at least in the industry or for Alkali Blue, we have started utilizing generative AI in our software development process. And this was done more than a year and a half ago, or maybe we started You probably hear like every week something new comes up, right? There's new releases. There's a race. There's definitely competition between OpenAI, Anthropic, and the prop cloud. Now we have Croc. So these are all trying to improve their LMs for specific use cases, not just for coding. So there is a lot of new advancement that comes out every week. But for us, where we have implemented it and we continue to implement it, is how do we increase our capacity? How do we increase our devolving capacity? so we can deliver more for our customer, we deliver them faster. you know, Jim, we have a product roadmap that goes for at least a year, year and a half. That is what is already laid out and the vision and the ideas go even beyond that. So my thought is always, how can we deliver not only on that, we're working on our Q1 and Q2 roadmap today, but can I get our development organization in a position where we can start thinking about... working on Q3 items. And we can do that by increasing capacity. And as you know, we can't just go hire 20 people and have them be effective day one. But if we're able to utilize AI to help us increase our capacity, even by 10%, by 5%, that really helps us with our customers. So that's really what we're focusing on is how do we help increase capacity and quality at the same time? Because you can use Gen.AI not only in coding. Jim Glennon_Guest Seg (23:04) Mm-hmm. Seever Sulaiman (23:32) but also obviously in the testing process. It can help you test better, find more issues faster before anybody else finds it. So that's really our focus from a software development lifecycle perspective is increasing capacity while increasing maintaining quality, but also increasing quality. Jim Glennon_Guest Seg (23:34) Mm-hmm. Right. We've called it the capacity explosion, right? There's a few components to it, but it's ⁓ largely driven by AI and just our ability to get features done quicker, which to me has always been kind of the more optimistic side of what happens with AI. It's not to be able to do the same amount of work with less people. It's to be able to do tons more work with the same amount of people, which is how we're employing it today. Seever Sulaiman (23:54) I was ready. That's right. That's exactly right. That's going to need capacity with the same amount of people. So it doesn't replace the job because you still need that, you hear about human in the loop, especially when we have senior architects or senior developers. I don't want any code going to production without my developers looking at it. Because what we do in financial engineering is really critical for our customers. we're not. Any near the point where we're going to trust AI to build code for us, do code reviews, test the code, test the product, and deploy it to production. I don't see that happening for another two years, especially in our industry, or at least our optimal loop, because accuracy, as you know, is very important to us. That's really important to our customers. So we deal with product appraising or MBS pricing, trading, we can't have any errors. So that accuracy is critical for us. So we're not going to have written by AI, be deployed by AI with nobody else. Jim Glennon_Guest Seg (25:22) Right. And presumably that's going on throughout our industry and throughout the world, just in the way that it's being deployed, the way AI is being deployed. And it makes sense. You can't have the same group of people develop code, deploy the code and test the code, right? You always need a second or third set of eyes. In this case, it would be the set of eyes of a human before code is actually deployed to production because there can be mistakes. mean, I see AI hallucinate more than it gets the answer right in some applications. Seever Sulaiman (25:51) Absolutely. Jim Glennon_Guest Seg (25:52) If we're inventing new technology, the last thing we want to do is let it automate itself and potentially cause problems. Seever Sulaiman (25:58) 100%. Yeah, 100%. I we have senior architects using, for example, Claude Sonnet, right? And they use it for one problem or one project. It works perfect. The next one, doesn't, right? And they know because they're looking at the code. And that's where I trust my development organization a lot more than I trust AI. But we are going to, we are using GenAI to assist us get a little faster, right? There's some... Jim Glennon_Guest Seg (26:20) Mm-hmm. Seever Sulaiman (26:26) work that you can actually have like unit test ratings, stuff that you can have AI built and write for you, but it doesn't really replace my organization. Jim Glennon_Guest Seg (26:36) It does some of the heavy lifting, the manufacturing of code, if you will, but it's still supervised. that's, you know, something that leads us to something else I wanted to touch on, which is related to AI. It's a specific application of it, I guess, is how I think about it, which is machine learning. And in our industry, there's a lot of different areas that you could envision deploying machine learning. There's several areas where we have already done that. So to me, machine learning is... It can relate to AI, I think, because it can learn. It learns from new information, but it generally is for applications where you're looking to chew through tons and tons of data to look for, whether it's trends or anomalies, mistakes, or even the ability to project what may happen in the future, whether it's you're trying to project volume for your organization as a mortgage lender or interest rates in order to decide what interest rate policy or even actual market conditions might look like. Is that, do I have it right there? First of all, like, that generally what machine learning is used for and how we would think about it? Seever Sulaiman (27:40) Yeah, absolutely. I machine learning is artificial intelligence. I mean, that's really one of the core of artificial intelligence. And all of these LLMs that you hear about, which is the foundation of generative AI, the LLMs are machine learning models. They're actually built, trained, using machine learning techniques and algorithms to build these LLMs, which are static. models deployed. So you hear about GPT 4.1, GPT 5. What that is, is really it's a trained model using machine learning neural networks based on, I think GPT 5 has 1.2 trillion parameters. Some of the smaller ones has like, know, 16 billion parameters and that's considered small, know, SLMs. So these trillions of parameters go into this neural network machine learning algorithm to build a model, right? And that model is your language language model or the LLM, which is really a static model that is used and deployed. And that's what we all use. know, Sonnet is one of them, obviously GPT, et cetera. But machine learning itself is exactly what you said, right? It could be predictive. It could be classification where you feed it a lot of data, a of data, and you build a model that becomes sort of like a like an engine and that model becomes a process where you can feed it data and gives you data. You input with some information and it gives you an output. So for example, if you build a predictive model for let's say bulk bit pricing model. So you can feed it a ton of data to train it based on historical information of how do you invest those beta loans and then that becomes your model. And then at runtime or... Jim Glennon_Guest Seg (29:22) Mm-hmm. Seever Sulaiman (29:33) When you want to use it, you say, okay, here's a scenario that I have produced what the expected value would be or the expected bid price would be. That's an example of predictive modeling or regression analysis. And there's different obviously types of regression analysis, linear or nonlinear. But there's also models, non-predictive models, you some classification where you feed in a ton of data and that's really what comes with LLMs. LLM is both predictive and classifications because you give it all this data and it recognizes and it tokenizes all that information based on the, like I said, trillion of parameters that go into the LLM. But also then we build a predictive model that would predict when you're going to say next or what comes out of next. So when you are giving it your text to summarize for you, for example, it has the ability to do that based on all of the information that was fed to the model. been utilizing machine learning, but recently sort of formally established our own machine learning organization, as you know, to work on how we can take advantage and utilize the data that we have within Optimal Blue. Because as you know, we have a lot of information, we have a lot of data we can use to build proprietary predictive models that help our customers. Jim Glennon_Guest Seg (30:52) Mm-hmm. Fantastic. Yeah, it's super fascinating. you use the example of bulk bid prediction. That's something that we've actually done for years here. And Optimal Blue, in case folks aren't familiar, if they don't work with us on the hedging and trading side of the business, we've been able to act very accurately predict what bids look like for live bids on mortgage loans. you could see how with anything, with sports, like predicting sports winners, predicting the weather, like a lot of these models are being trained. to again, suck down all this historical data, look at what may have changed, whether it's in the market or in the weather and manufacturing or whatever your area of business is, and predict future outcomes, which to me is just fascinating where normally it would take a human or a group of humans or actuaries to compile all this information, try to determine statistically significant trends, and then somehow get it right every time in terms of their math and their predictions. Seever Sulaiman (31:56) That's right. That's really the beauty of machine learning is it is a pillar of AI and it's proven because when you build a model, you always come out with a margin of error. know that there's multiple metrics that you use for machine learning model, like R-square or mean square error, but you have a number, right? You know that the accuracy of this is, say, 98 % and you have a margin of error of 2%. But the more data you feed it, And the more the data, meaning that you have different data sets or differences in the data, the more accurate and more predictive your model is going to be. Because you're not going to overfit it, you're not going to feed it the same information. And it's always going to say, yes, that is correct because it's same data. the thing about machine learning is you can really rely on it. And obviously, in financial engineering models, there's People rely on it. Netflix is an example where it predicts what you want to watch next. And most of the time, it is accurate. It is not always accurate because there is a margin of error. is a 2%, 3%, 4 % error rate. But it is published with these MLMs, sorry, with these machine learning models. Say, OK, the confidence score is 95 % or 98%. So you know what you're expecting out of Jim Glennon_Guest Seg (32:56) Pretty good. Mm-hmm. All right. Less accurate when there's a human component to it, like my own preferences of what to watch on Netflix, but probably a higher percentage for things like reading documents or maybe predicting volume. So yeah, I want to tease a little something here, something that we unveiled at the summit. So many people got to see it. It's not yet in the hands of clients, but we have a full working model of it. It is a machine learning AI assistant Seever Sulaiman (33:31) That's right. Jim Glennon_Guest Seg (33:47) We call it the virtual economist and it's exactly that. I think it's very well named. I want to see if we could pull it up on the screen here and ask it some questions. So this is an AI, presumably large language model AI feature that also implements and uses machine learning to make all sorts of predictions based on data that it can go out and find instantaneously. We talk a lot on this podcast about... what's going on in the economy and how it might affect rates going forward or how it has affected rates this week. We've talked a lot about like the conflict in Iran, for instance, and how that might change what's happening right now in the economy. frankly, Alex and James and others do tons of research online, listening to podcasts, reading articles, sometimes using things like Copilot to go out and find good information. But this AI assistant basically goes out and does all of that for you. Just if you ask it a simple... question in plain English, which I just thought is just one of these kind of perfect applications early on for AI and machine learnings. Seever Sulaiman (34:47) Right. I this is where we marry AI and generative AI, because it has at the top layer, it has the generative AI where we do use the LLM. We didn't build the LLM. These are obviously the GPT models that we use in this case. But it does use that for natural language processing, for speech recognition. But also, you can ask, and you will pull it up, where you have an avatar. Those avatars are also. Generative AI built and you speak with the avatar and it's able to process the information using Generative AI, right, using the LLMs in the backend. But it's also able to respond to questions based on that. But the beauty is the foundation of its knowledge is machine learning models that we built. There are four models currently that we built in addition to the OBFMI data that we have. also fit to it. So those four models are proprietary models that we built for interest rate prediction as well as rate lock prediction based on optimal blues data. And that's where we kind of combine Gen.AI and machine learning, which is also AI, into one application that is this virtual economy. Jim Glennon_Guest Seg (35:56) Right. Right. So it can use data from everywhere, from out on the web, where we may ask it for current events, then it can internally pull from our optimal blue data. So down the road, you would be able to ask questions not only on publicly available data and trends, but also tie that back to your own pipeline within your own business. Seever Sulaiman (36:22) That's right. Jim Glennon_Guest Seg (36:24) Cool. Okay. let's go ask the virtual economist a couple of questions, shall we? Jim Glennon (36:31) Let's start with something a little more involved. How we ask it how projections could change if we see some changes in Fed policy. So we'll ask what are mortgage volume projections if the Fed cuts six times in 2026? Cool. Very interesting. All right. So that's obviously taking from some of our internal data and making projections based on also some market data that's available to the economist out there. How about we go microphone here? We'll ask it maybe what... What are some possible effects on the economy stemming from the war in Iran? That is just wild. It would have taken quite a bit of research to come to some of those bullet points. Alright. Let's ask the economist one more question here. find out what its thoughts are on the incoming Fed share. Very cool. Jim Glennon (42:22) What are your projections for the OB-MMI for the rest of 2026? All right, very insightful. Well, wonderful. Thanks again, Virtual Economist. Thanks again, Seever. Talk again soon. Jim Glennon_Outro (43:21) All right, let's wrap this thing up. Thank you so much, Alex and James for the market update. And Seever, wonderful interview. Thanks again for doing that. We'll talk to you again here real soon. And that's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning in to Optimal Insights.

Jim Glennon (00:18) Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary, and these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode. Hi, welcome everybody. Today is March 9th. Great show as always for you today. In the interest of making sure you know what you should be watching, whether you're an originator, a capital markets person, or just someone interested in the mortgage industry and some great market commentary, stay tuned. We'll start out with a market update with Alex and James, and then Mike Vogue and I had the pleasure of talking with Julian Hebron, founder of the BasisPoint. So stay tuned for that interview here in a few minutes. Before we get to that, The OBMMI 30-year conventional mortgage rate is at 6.06 coming into this week. So a little bit elevated, 10-year also elevated at 4 and an eighth, 4.125. Oil has hit $100 a barrel. really starting to see some shocks come from this conflict that's been going on in the Middle East between us and Israel and Iran for about the past week and a half. We're not expecting a ton of movement in rates in the short term, certainly not a dip lower. If anything, a lot of the short term news and impact coming out of this war is likely going to be inflationary. Let's go check in with Alex and James and see exactly why we feel like rates shouldn't dip here in the short term. Jim Glennon (01:45) James, Alex, welcome. Thanks for being on as usual today to talk a little bit about what's going on in the market. And I think we would be remiss if we also didn't talk about what's going on in geopolitics over this past week and a half. Why don't we just start with some numbers? had the, you know, typically the biggest of the month, we had the unemployment report, which came out Friday. And we finally, well, depending on how you look at it, finally saw a negative. So we've broken below zero. We've potentially gone into some sort of contraction. We lost, I believe 92,000 jobs versus we're expected to have a small amount of build in jobs. But also had the unemployment rate, the headline rate tick up like a 10th of a point to 4.4. So still kind of a ho-hum situation, don't you think? But mean, anything that we should be reading into this report right now, or is it kind of an isolated thing that we should just keep an eye on? Alex Hebner (02:45) Yeah, no, I mean, I think you nailed the headline numbers there. We were expecting a slight gain, a kind of a normal economy, maybe slightly weakening economy, gain of couple tens of thousands of jobs for the economy. And this one was big surprise, back 92,000. First negative reading we've had in quite some time. then in addition to that, we saw revisions for the past two months also came down quite a bit. was a little bit of fuzz on this particular reading. ⁓ Some of this was due to some strikes that were occurring in the healthcare space. so those jobs were not being counted as part of this. And as we know, healthcare has been the carrier for labor market over the past few years. But yeah, yeah, minus 92,000. We'll to see if that trend continues. Again, the strike, I believe, is over. And so that should... lighten the effects, but yeah, no, it does seem that we got a little bit of relief there, of Q4, beginning of Q1 this year, but the weak labor market narrative has definitely come back, which was, again, this was a very surprising reading, that the private payroll's numbers, ADP's number was plus 68,000 right in the neighborhood of where the estimate for the non-farm was last week. So it really just came down to Friday. Big shock there. James Cahill (04:01) And, you know, looking back at January, it was, there was an assumption that January was going to be decently weak and it came in strong, right? We had kind of been teasing out like, why is the, ⁓ market consensus on this and it's going to be high and then it was so, but even when that came out, a lot of, you know, economists came out and they're like, Ooh, this is probably going to get revised down. You know, this number is a little high. It doesn't really jive too well. So seeing it get revised down and then seeing this month kind of of this slam the other way. That does make some sense, but I might call it a moving average and smooth these two out a little bit. Say it's just maybe not a full actual contraction here, but a low job support for January, February, 20, 30,000, maybe that neighborhood. Jim Glennon (04:50) Yeah, it wouldn't take much of a revision of this number a couple months from now to make it a positive number or closer to zero. Suppose it could go more negative. But it does, mean, the jobless claim and non-survey number, that number has been super low as well, meaning that there's not a surge in workers applying for unemployment benefits. So you got to wonder where this is coming from other than Again, we've talked about this over and over is that the workforce is stabilizing or even shrinking. So we don't need to create a bunch of jobs to keep people gainfully employed. You're just going to have minimal people, kind of an average of 200,000 to 225,000 people applying for job benefits, unemployment benefits. Meanwhile, we don't really have to add jobs to the economy to kind of float that decent number over and over every week. James Cahill (05:45) I know I've harped on this before too, a lot of the unemployment is in new grads, that kind of younger cohort. And you do have to have paid into the tax system order to be able to take out. So there's some of that going on. And if you're moving home, live with mom and dad while you're looking for a new job, maybe you don't apply for unemployment. So there might be some... I get noise or fog in that number to me. I've just always a little surprised by how low it is given the youth unemployment is much higher. Jim Glennon (06:23) Yeah, that's a super important point is sort of that ghost unemployment that's going on. Yeah, right out of college, you can't apply for unemployment benefits if you haven't actually had a real job yet. Interesting. we'll keep you apprised there. We'll keep, you know, one week or one month does not a trend make, but certainly these numbers have been weakening for a very long time at this point over a year. So certainly something going on in that realm. Alex Hebner (06:48) Yeah. Yeah, just to put some numbers to what Jane is talking about here. Every year we see that new college graduate age 20 to 24 bracket that Fred, the Federal Reserve Economic Data Center releases numbers on this. And every year that unemployment rate peaks around midsummer as you would expect. New grads finding jobs takes them two, three months to land somewhere. We see it peak July 2023, that number was 7.8%, July 2024, Jim Glennon (07:16) Mm-hmm. Alex Hebner (07:19) July, September of this year again. we're seeing it start to stretch out into the fall. We saw 9.5%. It's fallen since then. So it does seem that that rate has fallen. There's a big cap in there because of the government shutdown. So a little bit in there, but there is definitely a trend there over the past two, three years to change this point on college graduate unemployment. Jim Glennon (07:38) Right. A little bit of AI in there, a little bit of maybe a weakening economy. All right. So I do want to get to, we had some inflation numbers coming up this week, but before we get to that, I want to talk about something that may very well influence those numbers already and certainly will influence them in the future. And that's the conflict in Iran. We're a week and a half in to that. We began bombing, call it two Fridays ago or early morning, Saturday, Mideast time. And it feels like the markets initially thought, this is either a nothing burger for markets or this is at the very least is going to be positive in the long term because there's an angle here to lower energy prices over the long term. But since then, we seem to be having the opposite reaction from markets. Oil is hitting short-term record levels on record disruption. I was reading just this morning that 20 % of the world's oil is in some stage of disruption in terms of reaching its destination. So that gets you to the point where refineries are shutting down. natural gas, not just oil, but other fuels are being choked off where they originate, which is not a very short-term problem that can create problems down the road. So oil's through the roof. Equity seemed to be selling off on a lot of this news. Stagflation is being thrown around again, even though was already kind of lurking in the background with some of the stubborn inflation numbers we've seen and the kind of lack of movement from the Fed. Anyway, a lot to think about here, but obviously energy can drive up every other cost when it rises. Oil is an input to any product that has a destination, right? It has to get moved, it gets on a boat, it gets on a plane, a train, an 18-wheeler and so on. Meanwhile, we're having, you know, we may be having labor market issues. So I don't know, what do you make of this, James and Alex, in the near term? What are the effects that the market seems to be finally reading into around the Iran conflict? Alex Hebner (09:52) You know, I think I'm with you. think we came in little hot high on our horse last Monday, just on the back of 48 hours of very successful strikes. I we knocked out the Supreme Leader. We knocked out a number of defense ministers and generals in the process of doing that. I think the market sentiment at that moment was, ⁓ we'd knock to use the administration towards we knock the head off the snake. They'll come to the table and make concessions get what we want. That doesn't seem to have been ⁓ how things have evolved on the ground. does seem that Iran has in place a pretty decentralized structure. Their missile drone teams are able to kind of act independently and hit targets. And we're having trouble strikes to stop throughout the Middle East on Gulf states and Israel. so, yeah, I think the market is just grasping that this is going to be a more drawn out conflict. And because of that, going to see higher energy prices. probably at least for the next six months if I had to put a number on If they declared peace right now, we were talking about this before the call, if we get off this call right now and the peace in the Middle East, it's gonna take at least four weeks to turn on a lot of these refineries back on to get things moving again. energy markets are just like everything, it's just in time delivery. To an extent, there's strategic reserves that can be tapped into, but... ⁓ We see these flows shut down for any amount of time. It's going to produce some rising prices, which we can talk I think we'll see that start to bleed in as recently as next month's CPI and PPI reports. James Cahill (11:25) it takes about six weeks for the oil to actually make it out of the ground into a refinement and then into the gas pump. So all the gas pricing that's going up right now, I live right next to a gas station. It had a two handle a week ago. It's got a three handle now closing in on a four. all just preemptive because they're kind of planning ahead as to what is going to happen with prices so that they can make this work. the administration is saying, we're gonna protect ships going through the Gulf. Well, first of all, can you is a big question. Who's going to take that risk and find out whether you're right or wrong. But even if you can protect the ships going through, they need to turn all of the infrastructure back on and start pulling things out of the ground. Yeah, I think we'll know over the next three, four weeks if that's possible. And if we're able to keep things protected, the United States does have the trillion dollar military. I'm sure that they are going to keep at it and eventually they'll slow down strikes, but it is a ⁓ definitely a short term bump, but I would put my money on oil opening back up, but give it a month. Jim Glennon (12:35) Yeah, it's wild to read about. didn't realize quite the extent of it, but the articles I've read this morning, this is the largest oil or energy disruption across the globe since the 1950s, even more so than the embargoes in the 70s and the Gulf Wars. upwards of 20 % of the world's oil has been choked off in a very short period of time. And the reserves around the world are much smaller than they have been in previous crises. So that's why we're finding ourselves in this situation of price of oil kind of rocketing up towards and probably above $100 a barrel. So it comes at kind of a rough time as we've talked about here is you've got inflation that's almost certainly going to be stoked by this energy shock. Meanwhile, unemployment does seem to be becoming a bigger factor, but that puts the Fed in a position between two of their mandates, right? If inflation spikes and unemployment spikes at the same time, what do you do? Do you cut rates to? to keep economic progress growing or do you have to hold your ground and keep rates where they are, even raise them, because we start to see inflation go above 3 % again. And that's something we'll see this week, I believe, right? We have CPI and PCE coming in this week. Alex Hebner (13:48) PC, Correct, yeah, yeah, we'll see. CPI, PCE, I wouldn't, these will be the last pre-Iran War numbers. These are for February January. I think some of them are actually delayed for that very short government shutdown that we had. But yeah, these are all, these will be the last benchmark before the next month's numbers. They're expected on the higher end. Looking at north of 3 % on the PCE expectation year over year and 2.5 % on the Jim Glennon (13:55) Mm-hmm. Alex Hebner (14:16) So we'll just have to see where those come in. probably a pretty big divergence between non-core and core numbers moving forward, just keeping in mind that energy fuel is a big component of that non-core number. But it doesn't strictly exclude the cost of fuel, because the cost of fuel is built into so many modern conveniences, and as you were pointing out, Jim, transportation. no getting away from it on the core number, so to speak. Jim Glennon (14:39) All right. Yeah. We haven't seen the effects of the numbers yet, but we certainly will. think we may continue to see the markets sell off a little bit. Again, this is long-term, expansionary in terms of the military industrial complex, right? But in the short term, unless you're a defense contractor that's building weapons right now, we'll probably see a bit of a slowdown economically as we get into the second quarter of 2026. right, James, Alex, appreciate your time. Alex Hebner (15:08) good here. Thanks, Jim. James Cahill (15:12) Thank you as always. Mike (15:13) Welcome everyone to the February Market Advantage. coming to you off the high highs of the Optimal Blue Summit. was an amazing time in Phoenix. were at 500 plus ⁓ OB staffers, lenders, investors, partners, other vendors in the industry. Some celebrities made appearances at the summit as well. just some interesting tailwinds here behind the industry. prior to some of the macroeconomic events that have been happening recently. know, Brendan, I'll turn it over to you here. You guys kicked off on some of the data that we've observed this last month here. Brennan (15:49) Yeah, absolutely. Thanks I'll continue with the good vibes, I We'll maybe table some of the geopolitical things. think, perspective on that is obviously there's going to be impact from what's going on in the Middle East, are in no position to forecast what that impact is going to be. So we're going to keep going about our business as well, everybody else monitor the situation. I guess that's the trend. from a lock activity perspective, February was good. So, ⁓ good vibes coming off of our, our conference in, ⁓ Phoenix. saw as we pulled the data for the end of the really a strong, strong February. So, ⁓ both on the refi and the purchase side, had mortgage rates down, OVMMI 30 year conforming rate ended the month at 5.9%. It was down 17 bips from the same time at the end of January. Jumbo FHA and VA rates all declined by somewhere in the 11 to 13 basis point range over the same period. And that led to an increase in lock volume. We were up 9 % month over month, February over January and up 40 % year over year gains coming from both the purchase and the refi business. Purchase lock volume was up more than 14 % month over month and roughly 5 % against 2025. That's a welcome sign. After a slow January for the purchase market, if you recall, we were actually down year over year in January. Had some hypotheses there around maybe just a a tough month related to weather that kept people from moving on home purchases. And we were very grateful to see that pick up and turn around in, February. So we're trending ahead of where we were at the same time last year, right? Term refi and cash out volumes were roughly in line with January growing just. 3 % and 1 % respectively, but both figures are much stronger on a year over year basis. Rate terms were % and cash out's up 34%. The refi share dropped a little bit. We had a nice pickup in purchase activity. So the refi share dropped to 41%, but to put that in context, it's still the highest month we've seen 2022. I think it was the last time we saw anything that had a four in front of it. So really strong. month from a volume perspective. Interesting, some spread information here. The 10 year finished the month down below 4%, 397, down nearly 30 basis points. The 10 year to 30 year mortgage spread widened though. So the mortgage rally lagged a little bit. If you could get some tightening there in the mortgage market, the TBA is relative to treasuries. may be in an ⁓ even more advantageous position from a rate perspective here in the near future. Arm utilization, we've been tracking a little bit, continues to hover around 10%. And I think we believe that as the curve continues to steepen, adjustable rate products are going to continue to pick up volume or the economic incentive is certainly going to be there, especially as you start to think about folks, maybe if they took out jumbo or larger loans over the last few years and are going to look to lower those payments the rate curve moves in their favor. few other odds and ends. Average loan amounts were up above $400,000. I think we failed to mention it last month, but January was actually the first time we had tracked average loan amounts up above $400,000. mean, it's really kind of incredible that we're sitting here talking about $400,000 for the loan as just the average across the country. Probably not a good commentary for affordability, but it is what it is. Certainly good. for our originators to continue to see that average loan amount pick So we were up I think just about $404,000 in February, up from just above $400,000 in January. Product in, conforming loans represented about 53%, non-conforming near 16%, FHA and VA combined for about a third of the market, FHA at 17%, and VA near 13%. the, ⁓ final point here was that the non QM share remained flat in February from, from January. had kind of our peak month at just about 9%, a little bit over 9 % approaching 10 % in December of last year, and then have, ticked down a little bit. don't feel like that's any sort of, material change in course. I think the secular trend towards more non QM lending will continue. And I'm pretty comfortable that at some point this year, we're going to see. double digit percentages there. My comment on the secondary side, what did we have in February? Mike (20:26) Yeah, thanks Brendan. know, the one thing I wanted to start with was the best effort mandatory spread. So we saw this increase for loans, the conventional 30 year loan and the conventional 15 year loan. were up conventional 30 up three basis points and the 15 year up one basis point. Interestingly enough though, the government side of the aisle. So FHA and VA loans, my best effort mandatory spread, we're actually down about five basis points, over month. So it could be a world where we're just seeing some spread tightening there between best effort and mandatory pricing. So just something to watch there. kind of the big ticket item, which I think, you know, we've heard some rumors about this happening, but this is the first month where we actually saw it in the data where we saw the percentage of loans sold to the cash window compared to MBS securitizations quite a bit. So it from 24 % to this basically was a direct loss to the MBS securitization market. MBS securitization percentage went from 47 % to 42%. Now, I've heard this rumor out there for a while from lenders and investors and even some folks at the agencies that they wanted to pivot folks to less securitizations, more cash window. And that was something that we actually saw in the data this month. So it's definitely something we want to keep an eye on going forward here. Loan sold to the highest decrease about 1 % in or 100 basis points this last month. So from 79 to 78 % of the loans were sold to rank one. And then that was directly offset by loans sold to rank two. So what that's telling us is lenders are just looking at some of the softer representative mix guideline type things and they're impacting the loan sale. Another interesting trend, obviously, OBMMI was down throughout the course of the month. We're talking beginning of March now, it's kind of spiked up take away some of the gains in the previous month. But we saw MSR valuations increase. So ⁓ MSR valuations were two basis points in February. And this is despite on average, OBMMI being down six basis points throughout the course of the month on average. That's super interesting. We're still at a really rich valuation on servicing, a little under a five multiple right now. But the big thing to kind of think about here, this is a big topic at our conference, is the impact of retention. This is where lenders are investing more more and more of their time and dollars from a technology perspective. And I believe that's why we're seeing that kind of a counterintuitive move in servicing. Folks are really just putting a premium on that borrower for life and that next loan and next loan and next their borrower. And I believe we're seeing some of that offset the rate moves there. And lastly, we saw our investor flat at 14. This was at 11 or 12 for most of all 25. And we saw a jump in the beginning of 2026 to 14. And this is just the amount of investors that are bidding on our loan sales on average. And so it's been super interesting to see that stay here. So it wasn't a shot in the dark. We've seen some investors stay there with some more additional buying power. And it will be interesting to see how long that sticks and if it increases or decreases here in the future. But just to wrap us up, Brendan, I'd love to hear if you had a highlight from the summit that you want to make our listeners aware of. Brennan (23:50) my takeaway frankly was one of being grateful. This is going to sound a little cheesy, but to have that many people show up, we had just kicked this back into gear last year for the first time in San Diego. Did about 250 people. This year we were shooting for, you know, maybe a 30 % increase in terms of attendance and to have 500 individuals show up, as you mentioned, across the spectrum, clients, partners, vendors. really was, ⁓ yeah, I think I'm feeling very grateful, proud of what we did at optimal blue. Very proud of our marketing team. Shout out to the same folks that are, ⁓ producing this podcast for us every week. guess the only other one that'll throw in there is the virtual economist. you know, it's, it's, pretty unique. I was talking to somebody about, LOs, there used to be a, like an 800 number you could call and get forecasts. on economic activity was gonna be and where rates were gonna be, and this goes back maybe 20, 25 years, and now to sit there, look at artificial intelligence generated avatar sitting in front of us talking about rates over the next 12 months. live in a new world from a technology perspective, and very grateful to see that OB is taking advantage of all the new tech that's out there to deliver more value to folks in the origination community. How about you? You can't use Virtual Economist. That's the easy one. Mike (25:03) I'm going to use this to segue to our next section. We're actually have Julian Hebron on from the basis point to talk about his view of the summit and he did a fantastic job live blogging the summit. Folks should really check that out. But he's actually gonna be the guest on our next section here. And I'm gonna save some of my feedback for that one. So make sure folks keep listening. And we appreciate everybody hopping on the podcast today and giving us a give us a listen. Brennan (25:29) Thanks everyone, see you next month. Jim Glennon (25:31) Okay, Mike and I are here with Julian Hebron from The Basis Point. He's the founder of The Basis Point. Basis Point is a sales and strategy consultancy. They work with banks, lenders, and fintechs like us. Julian's organization helps top companies cut through the consumer finance, real estate, and fintech clutter to deliver sharp insights that consumers get and pros respect. Welcome, Julian. Welcome to the podcast. Julian Hebron (25:58) Hey, thanks, Jim. Hey, Mike. It's good to see you both. Jim Glennon (26:02) So, I mean, first off, Julian, for anybody who doesn't know, doesn't follow you, doesn't read your blog, just give us a real description. What is the basis point? What do you guys do? Julian Hebron (26:12) Sure. Yeah. Well, first of all, you you summarize like in the intro notes pretty well the the core theme of how we try to communicate about market topics and everything. But yeah, we were operationally involved with mortgage banks, lenders and fintechs, and we help predominantly with sales and growth. That's what I've spent my entire career first in the money management business before the mortgage business. But since 2003, as a mortgage banker in the spending time was, you know, mostly production up until close to eight years ago when I started working on the basis point as a full-time endeavor. But even in these last couple of years, we've gotten much, much closer again to the mortgage banking production trenches, because that's just how we operate and we like to stay. low to the ground on what's happening with banks and lenders and of course then the markets which I'm excited to talk about with you all today. Jim Glennon (27:14) Great. I appreciate that. That's good synopsis. Glad to have you here where we were happy to have you at the summit, which we'll talk about here in a minute. But we just talked about the Optimal Blue Market Advantage Report with Brendan and Mike. And I know you and your team have talked about how you follow that report every month. Were there any themes in the Market Advantage Report that stuck with you this week? Julian Hebron (27:39) Yeah, I hope what I'm about to say isn't a repeat of what y'all have already covered, but there's two key things that I noticed, at least from the basis point sensibility, which we view our job out there in the world as being the bridge between all the stuff that the industry knows and talks about with each other. But then because of my deep production roots, I like to communicate about what does this mean for consumers, right? And so there's a couple of things I noticed first. that the average loan amount that you all just reported in the advantage 395 to 405, right? So for me, this, this reconciles almost exactly with some of the affordability calcs that we do on a national level on an ongoing basis. do it every week. example, there's a really strong case for spring home buying building where you've got rates at six and an eight. That's a 1 % lower than a year ago. You've got. New home prices, median 414, that's 4 % lower than a year ago. So you got median of new and existing, existing and new respectively, excuse me, between 397 and 414. Pretty close to that average loan amount, but critically, what we like to do is a very realistic assessment that we put out into the media all the time because generally the media doesn't ever do this, but at these accessible kind of current median. price points household could buy homes with 5 % down at today's rates at six and an eighth, if they'd made between 118 and 122 annually for the household. And that is a true, that's based on a 43 % DTI that lenders obviously on. And that is also including a thousand in non-housing costs that we do. So it's a true lender calculation. And it just so happens to. reconcile almost exactly with that average loan amount. And then furthermore, the second stat I noticed for you all in the advantage was that you just reported that, and you guys gotta help me if I was reading this right, but that purchase DTIs down 1 % for all loan types in January and the share of first timers, first time buyers rose to 45 % of conforming loans and 70 % of FHA loans, which again, reconciles with this math that we do. every week using lender calculations. So I just thought that it was a confluence of events to say all the data, not the message points or the propaganda, but real data points to a very positive spring home buying season for folks. Mike Vough (30:11) Hallelujah. ⁓ Like this is this is what we've been like observing. And but I think there's some interesting things to kind of unpack in there as well. Jim and I were both shooting off like fireworks when OBMMI got below six a couple of weeks ago. You know, it's jumped up a little bit here. The start march. regardless, like if you think about where if you buy if you buy down the rate, if you think about arm production, we saw arm production hit about 10 percent of originations. Jim Glennon (30:12) Yup. Mike Vough (30:39) In February, you're in a world where there's even some more rate relief there. If arms take up more of the origination percentage share, you can see people in that five to five and a quarter range, at least for the teaser period there. And I think folks are a lot more education on that product now today. you're getting to the point where there's a lot of power there for the consumer, is really exciting. Julian Hebron (31:06) And the reason I like to hammer it is because it doesn't make big headlines. You know, the headline is, gee whiz, we're back above six now. We're at six and an eighth. Rates came up, you know, an eighth. They came up 12 and a half basis points. We're good. And again, we like to use those calcs. How much money do I need to make if I'm putting 5 % down with today's rates? I need to make between 118 and 122. Jim Glennon (31:20) Right. Julian Hebron (31:34) There's millions of folks that can do that out there. Jim Glennon (31:38) But the creativity continues regardless, your rates can go up a little bit, down a little bit, but I feel like some of this incremental increase in affordability can come from just lenders getting smarter about how they're structuring deals. Of course, have home builders who are buying down the rate and a little bit of that becomes artificial, the true, even in the refi world and the purchase world, you're getting more creativity that I think is just incrementally lowering that DTI or raising that affordability scale. Julian Hebron (32:04) And for what it's worth, would just not to jump in on a ⁓ OB product plug, but near miss scenario functionality, I think is absolutely critical for this because near miss scenario means that if you're busy, you're taking in customers every day, you're going through and you're like, the DTI is off, but at least it's now going, you know, with this new tech that you're rolling out. least now it's going to show me, wait, if I just tweak, so Jim to your point, if I maybe talk about it in a slightly different way, I can kind of get there. And it's just helpful, I think, to have that OB reminder stuff on the screen. Jim Glennon (32:45) Absolutely. Good. All right. So, definitely we've talked a lot about the summit on this podcast the last couple of weeks, but I wanted to get to it here as well. Cause obviously we think the summit is super cool. But you were, you were at the summit. You wrote a fantastic, thoughtful blog throughout the summit, which I thought was excellent. Everybody should go out there and check it out. I was reading it all during the summit and afterwards. as an attendee and an industry expert, Can we just get into a couple of things, just your overall impression of the event, but also like pieces that you thought were particularly valuable. And Mike, I would invite you to do the same obviously as an attendee, but as an OB person. Julian Hebron (33:31) Sure, Mike, do you want to go or do you want me to go? Mike Vough (33:34) A guest first, Julian. You go first and then I'll jump in after. Jim Glennon (33:37) Yes. Julian Hebron (33:37) All right. Okay. So let me start with this. couple of things. One, customer summits that also have an industry summit kind of feel are very, very hard to pull off. The basis point is fortunate to be in a, have a perspective where we get to see a lot of these different kinds of things going on for y'all to make your customers feel completely comfortable and not totally sold to while also providing real thought leadership. And this broader industry networking something that struck me. I'll give an example of that, which is I often like to call the, you know, with the basis points, public remarks, we will always call OB an ecosystem company. Why? Because similar to systems of records in both originations and servicing, We believe that everything from product and pricing engine all the way through hedging and trading is operate. It's the lifeblood. That's what we said a couple of times in the blog last week. That's just the light, know, gain on sale is the reason our industry is here. Right. And so critical operational infrastructure from Main Street lenders to Wall Street traders. That's the ecosystem company, part of the software and the technology and the company. But to have that, to see that come to life at the live event was really notable for me this time because it did cross over to my point from being say more customer summit to customer plus industry summit because it doubled in size, right? I think that I have this right, but it was approximately 250 last year and it doubled till about 500 this year, correct? Jim Glennon (35:25) Yep. Yep. Julian Hebron (35:27) And it felt like that and it had an entire exhibit hall, but all the exhibitors, again, they're part of the ecosystem. think your team may be more so, or at least equally to the, LOS and the servicing systems of record integrate. Just as many, if not more companies. So everybody who's there, you're all that software. at first quote to consumer all the way through the hedging and trading is all integrated to you. So for everybody to be in that same ecosystem live was very, very meaningful. You all do a good job marketing, but there's nothing that can replace the feel of getting everyone together. And some folks complain that a lot of events can look and feel the same, but this one just didn't. look or feel the same. just, had that deeper dive because it is a customer summit. So the sessions are very weedy and important and technical, but the networking and everything else had that industry feel to it. Jim Glennon (36:38) Well said. Go ahead, Mike. Mike Vough (36:39) double down on that, like the energy in the room was just very different, I felt like. And there's a video that OB posted on LinkedIn where I'm talking about the energy of the sub. And I think that was real because you covered these different bases of in the weeds, like segments where. Julian Hebron (36:44) Yeah. Mike Vough (36:56) We're talking about non QM, we're talking about retention, we're talking about margin configuration, loan sale strategies. But then you could pick your head up and you're at the product reveal. You're you're hearing Bob Brooksmith talk about policy, you're hearing Mike Frantone talking about the MBA stats, you're talking to Michael Phelps, CEOs of the industry. So it was that well roundedness, I think made it really special. I'm a sucker for the product enhancements for my previous lives and product and There were a couple there that was dreaming about for years, like the profit center, for example, and renegotiations flowing back and forth between the PPE and the hedging and trading systems. So I was geeking out in the audience for that. But then conversely, my ⁓ session with the CEOs on stage, I got kick out of some of the things that they were sharing. The feedback from Michael Phelps on taking bite-sized chunks of big goals was something that's still rattling around. Julian Hebron (37:31) Yes. Mike Vough (37:55) So it kind of hit all those different, you know, mile deep niches, but also kept people involved at this higher level that everyone can understand as well. Julian Hebron (38:05) Well, let's do a quick Michael Phelps hit and then we'll come back to some of those technicals because I'd like to at least hit maybe one, which is like renegotiations. But I happened to just be nearby after the Phelps session and you and I were talking to your CEO Joe and I made a note to him, as you might recall, when we were just huddling there that it's not about Great interviewing is not about a great plan. When I do interviews and panels, I am an over-preparer and I have a plan, but plans do change. And Phelps is so dynamic, it ended up that Joe had most of the questions that he had planned maybe answered in Michael Phelps' answer. But the best part was that Joe didn't feel compelled to be like following a script. He adapted in real time and that was just such a dynamic session. Don't worry if we're not just sitting here talking about a session. If you weren't there, the BasisPoint Optimal Blue Summit Live blog documents it pretty painstakingly. So if you just go to thebasispoint.com and scroll a little bit, you'll find the Optimal Blue Summit blog. You got to read this Michael Phelps segment because sports person or not, some of the stuff he said when he's speaking to a sales industry, everyone in our industry is, has got this mindset of trying to push harder and figure out how to wake up every day and fight. I just encourage everybody to read it, man. Phelps was incredible. And Joe, as an interviewer adapted so well to it. was great. Jim Glennon (39:53) 100%. It was, I was honored to be there, honestly. And you're right. was Joe kicked it off and then Michael ran with it as kind of a monologue. just, it just evolved throughout the thing, but it felt, it still felt so natural. And it was. Julian Hebron (40:02) Yeah. Yeah. It did, yeah. So, if I may just one more thing, just, just yes, like this, getting your entire, getting the entire optimal blue stack tighter, including, as you said, negotiate renegotiations being now completely just threaded back and forth. Couldn't come soon enough. I would just like to offer as we get into these radical. mini-refi booms that happened that much faster and pricing is changing and then customers are coming back and they want to change and you have to change or else you're going to lose them anyway and risk EPO issues and all these other things. So the ability to get all that done faster, it was very palpable to see how this entire, again, ecosystem company stack is really getting tighter each time we take a close look at it at the basis point. Mike Vough (41:05) Yeah, and I think like friction points is a big thing that we're looking at. you know, the loan officers on average are in, we clock that somewhere in that 11 to 12 different screens a day to get their job done. And we've talked to some of the owners of companies. And if you're an omnichannel lender, you might be working with upwards of 20 to 30 different vendors to run your business. So every time you're logging into something else, every time you Julian Hebron (41:09) Yeah. Mike Vough (41:33) to transfer data from one system to another. That's a friction point. That stuff adds up. One of the integrations that we announced that I was ⁓ geeking out ⁓ in the audience about as well was our integration with TradeWeb. That was something that our traders had to go into something else and do this. And now within a single UI that you're in all day anyway, you're able to go out, execute trades, not have to write them down. similar to the renegotiation workflow. It's straight through. towards the end of the capital markets life cycle, but it's straight through this process. And we're just looking at different friction points to get away here. So very excited about some of these things that are that come in the market here. Julian Hebron (42:14) Mike, it's funny because you all have been very gracious when I come on the pod and sometimes let us flip it and I ask you a couple questions and I had TradeWeb as one of my questions for you. So you did just cover it, have a pretty broad because again, you've got like the wholesale side of the industry and then you have the whole cap market side of the industry listening to your pod. The cap market side of the industry knows what you just said. But for the sales side of the industry that's less familiar with it, like if you would, because this is a breakthrough, this is a big deal. So could you just tell them what TradeWeb is and why it's so important? Mike Vough (42:52) Yeah. So TradeWeb actually originated from an inter-broker dealer system. So if you were at Citi or Bank of America or Goldman Sachs and you needed to trade mortgage-backed securities, you would go on TradeWeb and you would trade it. It's an electronic trading platform and it became dealer to dealer. Eventually, that got spun out, became its own company, and it became an interface for your capital markets desk at a lender. to trade with Wall Street broker dealers. So typically, hey, you know, a million dollars of production comes into Mike Vogue mortgage. Well, I now need to go out there and I need to sell a million dollars of a mortgage-backed security to hedge my interest rate risk. That means I'm logging out of a system or I'm calling the Opmo Blue trading desk and they're going and doing it for me. And at that point, that trade that needs to be entered by a human, right? So the human then the executes to trade in a different system. They're looking down at it. They type it up. Maybe they put 15 instead of 50. Maybe they put the wrong coupon in the wrong settlement. And then that flows into your system. And then you're making risk decisions based upon that. So there was always like a human error piece there. And we have a, we have a robust operations process to check that. But with this integration now it's straight through. And Compass Edge, our hedging and trading platform is a mobile application. So theoretically you could be on your phone and be doing this. And we're just really excited about this integration. Jim, I'm not sure if there's anything you want to add there on this subject as I run in the desk. Jim Glennon (44:31) Yeah, I mean, love it on the desk, obviously, as you mentioned, transcription errors. Like we have an entire back office that they do a lot of things in our back office. They monitor wholesale loan traffic. They interact with our system and upload pricing. But a big part of what they do too is just confirming every single trade that we do on the platform every day, which could be 500 to a thousand individual trades where they have to hand check like eight pieces of information for each of those trades. can kind of do the math in your head on how long that could take a human. But we are, by integrating with TradeWeb, along with some other AI features that we're building in the background for confirmations, we're kind of eliminating the need to have that human interaction those trades. obviously, if you're doing the trade directly in the system, there can be no transcription errors. So you kind of balance that out. And then you have the AI features that look for things like anomalies or trades that were hand-keyed in from other types of dealers that may not be on TradeWeb. So a huge pickup for our desk. way more efficient without having to have three screens set up in a row and spend that time. And then eventually, I see us integrating with other systems is another thing, right? Some of the broker dealers have their own trading APIs that we would connect with. I see us approaching this project the way we would on our PPE, which is if you're a POS, LOS, like we want to integrate with you. Whatever our client needs, whatever our client brings us, we want to... have a back and forth automated integration with that product. Mike Vough (46:03) And I think this talks to the larger problem we're trying to solve too, where the mortgage industry is an accordion model of staffing, right? It widens out when rates go down, it tightens when rates go up. This is a way where, you know, when we observe what happened in 2022 when rates jumped all of a sudden, we do see people unfortunately lose their jobs. And it could be that secondary or tertiary person, like in a cap markets desk and That's really unfortunate, but we're hoping that the software can help people get a little more stability there because we have the Confirm Assistant who's checking out trades. We have this integration that's saving friction and time. And we're hoping to do that just across the whole OB stack. But it goes back to that whole accordion model of staffing that the mortgage industry is just captured by. Julian Hebron (46:49) And something I learned while doing this very, very deep dive with the live blog and everything that I just want to underline for your audience, Optimal Blue supports 40 % of loans, Hedge and Sold into the mortgage secondary market. So needless to say that connectivity just makes it that much cleaner. So yeah, the trade web thing was a big deal just because that's, Jim, to your point, yes, integrating with other systems, but that's kind of like The gold standard. Yeah. Yep. Yep. So ⁓ if it's okay, I wanted to ask it. Can I ask a couple of other questions? Because there's there's and it's related, Jim and Mike, to the to some of the stuff that we observed at the summit. But virtual economist is something that you all rolled out. Jim Glennon (47:18) Absolutely. Yeah. The blue screen. Of course. Mike Vough (47:31) Go right ahead. Julian Hebron (47:43) And in short, it's an AI economist. if lots of shops don't have those types of resources or their cap markets desk folks are the market experts, but they get busy and they can't talk to every single loan team about what's going on in the markets. So two things we noticed. One, super reliable. and nimble like with real scenarios and also very much talking about it like like talking about the virtual economists could talk about scenarios in much the way a responsible human economist would, which is all if then scenario stuff. but the other thing that I just really liked about it was that the real life scenarios like so example As we go into the week here, we're coming off of a jobs report for February that was a surprise on the downside. We've got the war in Iran, which is creating inflationary concerns. On the one hand, have maybe jobs, lower jobs and higher gas basically should there are two different sides of the mandate almost exactly and the good news is for now that means sort of steady rates but everyone wants to know what might happen. This virtual economist can handle these scenarios in real time. That was the thing that kind of blew me away secondly the other thing and this is kind of a question that I have is you all spent a lot of time about the methodology of accuracy and what's going into it. And I wonder if you want to maybe make some quick remarks. We, again, the live blog, we covered a lot of the core methodologies for how you're getting at the accuracy, but would you mind explaining that? Cause when people hear that, they're like, I don't know about that, but the accuracy methodology I was, I was frankly blown away by. Jim Glennon (49:45) Sure. I could touch a little bit on that. mean, the virtual economist is so it's in its nascent stages right now in terms of where it gets its information and it's all, it's as if you went out there somehow and someone asked you a question, you were able to read every single book that was ever written about it, right? And decipher that information and then not only explain what you just read, but then forecast out the possibilities of what could change in the market given tweaking one of those books or changing the ending of one of those books. So the example that was used at the summit was, give us a projection of the OBMMI, which is our conventional 30-year fixed index that we talk about a lot on this podcast. What's the projection of that number going out the next 12 months? And that was relatively easy for the economists to do. And then you could say, okay, what if the Fed cuts rates four times this year instead of the expected two right now. What would that do to that projection going out 12 months and vice versa? In fact, we were playing with it the other day. You mentioned Iran. We asked the economist, what now are the possible effects on the economy and therefore on interest rates now that we know that we're at war with Iran and there's an estimated period of time that this war will continue and what oil prices have done so far? What is your best guess on? what happens with the OBMMI going forward, given that information. So it's basically like a co-pilot or other types of AI applications. It's going out into the web and scouring every bit of piece of information and sort of deciphering what kind of fits the trend, what makes sense to use in its analysis. I think you would add to that, Mike. I mean, I'm not the AI guru by any means, but that's how I understand it. Mike Vough (51:35) Well, a couple of things I'll add. I was sitting in the front row next to one of our lender clients. And as the economist was speaking, I was just pulling up minor things to fact check the economist, because if you can't if you can't prove these like building block things, like a simple one, which I was half joking when I did this was the economist said what day it was. And I took my phone and I showed it to the client say next to me just to make sure he said the right date. I've got the OBMMI app on my phone. Jim Glennon (51:46) You Mike Vough (52:04) I pulled up OBMMI and he started quoting OBMMI to virtual economists. And I showed the client next to me that he was nailing those facts, right? And those building blocks, making sure you get those right, help folks understand the projections later, right? If it's garbage in, you're gonna get garbage out. And it was nailing the garbage in, right? It was hitting these points that are these building blocks that are really, really important. The part that stuck out to me as well was when we gave it, we asked for the projection. Jim Glennon (52:24) Mm-hmm. Mike Vough (52:32) It also spit out some other key assumptions that went into projection. It told us what OBMI was the last couple of days. It told us different spreads that make up OBMMI, what the 10 year treasury was at. And so it was working through not just the projection, but also these building blocks that get you to the projection, which I thought was really powerful. Another thing, and then I'll pause on this subject is, It's not just a virtual interface as well. There's also this, there's a machine learning model behind this that is accessible via API and we're hitting it in different parts of the product. So in our profit center, which is where we're going to have the landing page where you can hit every, every OB product and you can get that bird's eye view of the whole ecosystem. There is a projection of your individual lenders lock volume that's coming from your virtual economist. So you could be in there talking to your economist, your projection could be going up or down, your profitability, your loan volume projections are also changing. So this thing is living and breathing and feeding other parts of the ecosystem, which I think is super powerful. It's not just some widget that's like over to the side. It's interconnected everywhere in the platform, which I think is very powerful. Julian Hebron (53:50) I agree. And that's, that's the part that I went in talking to some of your customers after everybody saw and getting these real time reactions. The fact that it, you know, cause something else ask OB is, is the, is the, is the product that you all rolled out. If I, if I have this right, was last year because we actually hosted you all on a couple of demo stages when you were rolling it out and it's, and, the types of questions I'm just going to rattle some off really, really fast that cat markets pros are asked. already before the virtual economists were asking OB how much was my average margin percent by loan type for August? Who are my top five originators in lock volume in the past two years? I mean the granularity, how many 5-1 arm locks were last week? How many 30-year commitments with Fannie Mae do I currently have? Granular, granular, and then this, if I have this right, and this is a key question I have for you too. That then also, the virtual economist is also then, I think what you were just saying, also knows the data of the team that's asking for it. So it's not just broad macro stuff. It's also about their world as well, correct? Yeah. Mike Vough (55:05) Correct. So yes, it might answer where OBMI is going to be or maybe where total MBA originations might be. But if you want to ask about your volume, it will tell you. It won't tell you your peers volume, but it will go through your individual lending ecosystem as well and give. dialed in projection. So what I mentioned earlier, we have this the profitability center now one of the one of the pages or screens on it is your trailing lock volume plotted against OBMMI and then X stays in the future showing the OBMMI projection and then your volume and your expected margin as well. So that's gonna be dialed in based upon your economics and how your your company has basically dealt with these types of rate moves in the past. But if it wanted to go and do these macro projections, it could too. So it's a little bit of the best of both worlds in my opinion. Julian Hebron (55:57) I asked this question on the live blog, now I'm going to ask it live live, which is, it a good idea or are you already doing it to roll it out? All the virtual economists to loan officers too. Cause I'll cast my vote for that. I like, I like that idea, but I understand the risk. So what's the sentiment there? Jim Glennon (56:19) I think sky's the limit with something like this. I don't know why we would hold it back. I don't know that we have specific explicit plans on any sort of restriction there. So I would probably vote the way you're voting. mean, it is, it is again, to get back to your accuracy kind of question or theme, it's based on real data. It's data that you can get to anyway through things like ask OB, or even if you were to query your own data, it's just a faster, more efficient way to do it that includes the machine learning element that then. allows you to project forward, which I think is valuable information for anybody, maybe even more so for an originator who's looking to plan out their business over the coming months. Julian Hebron (56:57) And frankly, field questions from borrowers every day about, I just read this article about, know, Raid said this and you locked me at this. The ability to have the virtual economist provide quick, intelligent and accurate market Intel is why I like it so much. the optimal blue virtual economist does not hallucinate. think humans hallucinate more about macro market outlook than the optimal blue virtual economist. Jim Glennon (57:16) Yeah. Yeah, we, I certainly do. Yeah. think that's the second point, as you said, is, to be knowledgeable when they have those conversations with borrowers. know, you only have so many hours in your day to read so many articles. The economist is out there reading them right now. Julian Hebron (57:39) Agree. Yep, agree. Mike Vough (57:41) One of the pieces of feedback that a lender came up to me about after seeing that was like, can we customize the avatar? They wanted their head of cap markets to look like them so that they could kind of get like that scale because the guys at these lenders who are like, uh, head of cap markets, they're kind of the master of this like dark art and they're really busy and they're jumping between this and that. And the ability to kind of take that persona and scale it. Jim Glennon (57:49) Yeah, it make it look like them. Julian Hebron (57:51) Yep. Right. Mike Vough (58:09) to the hundreds of loan officers that they deal with and give them that insight is really valuable. It helps move that loan officer, more of that advisor that we've been hearing in the industry for a number of years now. How do we coach our loan officers to go from not just that deal to that advisor type? think a tool like this could be really helpful to assist those folks as they try and transition there. Julian Hebron (58:32) Agree, agree. there is one more question I promised on the blog that I was going to ask on the pod is do we have time for one more? Jim Glennon (58:41) Absolutely. Let's do it. Mike Vough (58:42) ⁓ Let's get one more in. Julian Hebron (58:44) All right. So Mike, you hosted this great panel ⁓ of lender executives and part of that panel included a comment from Kevin Peronio at PRMG and it was, he said that one of the biggest issues that we need to solve in our industry is shortening the time it takes to settle a security. And, you know, he kind of made some notes about like, this has helped by end-to-end systems like Optimal Blue, but market structure, let's say market tools can only reduce it so much. So when I was live blogging this, my question that I said I want to hear Mike sound off on was, is blockchain the answer? I know that blockchain is not the greatest It's more complicated than everybody had hoped that it would be in terms of reducing basis points in the system overall and getting to T plus zero on trades. I believe sometimes, you know, the vision of T plus zero that blockchain can maybe bring. Should I believe it or is it not blockchain that's going to solve it? Mike Vough (1:00:03) Yeah, I think there are things that blockchain can solve. I'm unsure if this is the one where my focus goes with blockchain is servicing transfers, title insurance. I think those are the ones that are screaming for something like blockchain to help. I'll let Jim opine here in a second, but I kind of think the market structure of, hey, TBA settle on a given day and there's a lot, there's a a couple of days before that you have to stop trading them. I don't know necessarily if blockchain would help with that. I think you would need to see a larger kind of change in the industry in terms of how people actually sell their loans out there. And there's so much that goes into them. If you look at private label deals, for example, which were a lot of the non QM loans go, you know, it's almost a million dollars in legal fees for a single securitization. Blockchain, I don't know if helps with that. So there's just a lot of these other things that have to have to stop that. But in general, think title and servicing transfers ripe for something like blockchain unsure if t plus zero is impacted on TBA securitization. Jim Glennon (1:01:11) Yeah, I generally agree that I don't know if we're focused there yet, although we've all had that vision of better, just better commoditizing the mortgage loan, right? I mean, you can go out and trade a Nvidia stock on any platform on the internet and get immediate execution. It's obviously very different for a mortgage loan, but it generally works. like, you know, it's the second largest debt market in the world outside of US treasuries and they all seem to have very good liquidity and just huge mass of volume. So I feel like it's something in the middle there, like getting from the borrower to getting it into the security, even before it settles, like that piece seems like it continued to get smaller and it is getting more granular, right? We talk about specs on this podcast a lot, specified pools, just the granularity to which we're going to get tighter pricing so that we can bring in more borrowers. And so we can get certain types of borrowers and certain types of loans a better rate. That's going to continue to evolve and get better and better. The settlement process, I think, going to be up to the capital markets, folks, for at least the foreseeable future. It may not be where we focus. But blockchain is on the short list of things that could solve it. Just, and I don't know, more about blockchain than maybe how to spell it. So it's possible that there's other options out there that are simpler. Julian Hebron (1:02:31) Well, it sounds like it comes back to the part of the question of the setup, which is that it's mostly helped by end-to-end systems like Optimal Blue, Like, because it's just there's so much nuance in it all. Jim Glennon (1:02:40) Yes. Mike Vough (1:02:43) Yeah, if I could, I'm gonna get my soapbox for a second on servicing. So if you could get the end to end servicing trade figured out and make it in a way where it doesn't take years to process a large servicing transaction, I do think there's a lot of untapped value there, not just, you know, to further commoditize it, but also to give value back to like upfront pricing, it would help with, you know, providing more liquidity into that space. Jim Glennon (1:02:44) Yes. Mike Vough (1:03:08) trading in smaller blocks right now, you really can't trade a servicing transaction less than a billion dollars of UPB. You might see a a couple hundred million ones out there, but very far and few between. So if there was a way to kind of come further commoditize that I think there could be a lot of value untapped there. And I'm actually going to mill over refi right now. Don't get me started on title insurance. But the fact that we're still we still have to pay insurance because somebody might ride over the mountain on a horse and claim your property is preposterous to me. those are my two soapbox moments. Jim Glennon (1:03:38) Amazing. That's great. Yeah, that's, I would say for sure. The servicing transfer process is one of the most archaic things in our industry, probably in the title, the little, I don't know, gaps in the title insurance process are a bit spooky and you almost don't believe them when you hear them. So I'm sure we could do, do better there. All right, gentlemen, we have talked about a lot. I'm blown away by how successful the summit was. with what you did with the blog, Julian, with what we've talked about here today. Hopefully everybody is still listening and got a lot out of this podcast. Thank you so much, gentlemen, Julian, for joining us and Mike, as always, for being a regular guest on the show. And I wish you guys a wonderful weekend. Julian Hebron (1:04:25) You as well. Mike Vough (1:04:27) Thanks, Jim. Jim Glennon (1:04:28) All right, let's close this thing out. Thanks so much, Alex and James. Thank you, Mike. And of course, thank you, Julian, for joining us on the podcast today. And that's it. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.