[Alice] Thank you, Matt. Check out mbslive.net for up to the nanosecond updates, and you can use the sign-up code LOL to get an extended trial period without having to put in your credit card number. All right. That is a lot to digest between what Les and Matt had to say. We had a crazy week. So Bill, I’m just gonna turn it over to you to let you jump in on your take on the markets after all that went on.
[Bill] Okay, thanks, Alice. So a couple of things in our internal group text before the Fed announcement last week, I had said, ” If the Fed didn’t move, 10-year would go to five 15. If the Fed moves and Trump became un-unhinged, I think the market would also hit five 15. Fed moves with a quiet Trump, four 90 is the next benchmark,” So Trump has been pretty quiet, so I think that’s helped. And to Matt’s point, kinda grinding down into the, low four 90s is certainly the next critical level. But in terms of the question that everybody’s asking, so kinda, where are things going forward? And I had a sales meeting with a client this morning, and that was the first thing from the sales folks of where are mortgage rates?” And there’s a ton of analysis out there, and my very simple take is if the two wars end, 10-year goes back into the mid-fours, right? We talked last week. Last is a little more aggressive, talking four 40. I’m talking more like six 50. So split the difference. Mid-fours if two wars end, To get any more than that and we talk about all the economic data I’m actually gonna put that second on the list, To me, the next most important item is spending has to get under control. And everybody’s focused on economic data, and that, is relevant. But now that the Fed has acknowledged that they will raise rates, they’re gonna manage to the economic data. The, thing that is gonna prevent rates from dropping dramatically is government spending. It just, Republican, Democrat, Independent, it doesn’t matter. It is out of control, and it’s going to take a decade to get it back under control, but rates will not, start to react until folks feel like there’s a credible plan. that’s, another way of saying, folks, just don’t wish for where rates are, ’cause there’s a lot of things that have to happen that are way out of anybody in this country’s control, in terms of ending wars and getting spending under control, those are two pretty big items. The other thing that I wanna hit on a little bit, there’s been a lot of chatter over the last couple of days about an export ban on diesel. And the first thing is, and I went back and looked, and Alice, you may have it in your notes, but we talked about this in the beginning of April great piece put out by Chris Whelan, institutional risk analyst, that talked about in four to six months, the question was not going to be the price of oil, but the availability of oil products, diesel being number one. Now, the price of diesel is almost double but a lot of it is even now coming down to what can you get? Both ends of the, supply spectrum, right? Costco announced last week that they’re limiting Motor Oil purchases to, I forget however many quarts at a time, right? That’s local. And macro level, Saudi Arabia announced to European clients that certain refined products, that their last delivery they’re gonna get is September. So The inflationary shocks on petroleum related products, so let’s, get more specific than just oil, are going to get worse before they get better. it’s something that everybody just has to be aware of. And then because, when you get a bad process, somebody is standing off to the side saying, “Here, hold my beer. I’ve got an idea.” In this case, it’s being kind of biggest mouthpiece I’m hearing right now is Chuck Grassley is pushing for a ban on diesel exports, right? About 25% of the diesel that’s refined in the US is exported, he took an economics class somewhere along the way and said if you stop diesel going out of the country, there’s more supply, therefore, prices are gonna go down.” Two fundamental flaws with that aren’t really being talked about by people like Grassley anyway. Number one is the northeast from DC up and the West Coast, based on pipeline layouts, actually import their diesel from Europe and Asia. If we stop exporting diesel, what do you think the countries that are sending it to New York, Massachusetts, California are gonna do? Number two the refineries that are refining oil, and diesel is a big part of it, once you stop ex– stop 25% of your market, they’re gonna have to start shutting down entire production lines, which reduces the amount of other oil related products that are available in the US. take a bad situation and try and come up with the worst case scenario. I think they found it
[Alice] Go ahead, Dave
[Kittle] Agree with everything Bill said. I just have one scenario in the last part of the math. If we restrict exports and the foreign countries that send it into New York, I think that was your example, doesn’t send it to the US anymore, then that opens up a bigger portion of the market for our oil companies and refineries so they don’t have to shut down production. If less is coming in, they could distribute more in the United States, I think, if that math works.
[Bill] The math works, it’s the distribution that doesn’t. And like most of the, pipelines from the Gulf Coast end in the Mid-Atlantic states when you’re talking about coming east, and there’s really nothing going to the West Coast. And, by the way, y- this comes up a lot where, over the years, the refining capacity in the West Coast is not only has not been growing to meet demand, but it’s been dropping because, again, there’s– effectively there’s no pipeline infrastructure from Texas heading west to the West Coast. It- So then if you start saying, “Okay, there’s extra capacity sitting in refineries in Louisiana,” that’s great, but there’s no way to get it to the Northeast, the West Coast, which is why they were importing it in the first place. So it’s as much a distribution problem as anything else
[Kittle] Is it four refineries that were shut down during the last administration in California, Newsom and Biden? Is that what they shut down?
[Bill] That sounds about right. again, could it be three versus four? Yeah, but it’s more than one, I think it took the capacity to where you’re going. It took capacity from four or five down the semantics argument is did you reduce capacity by, 70% or 80%? At the end of the day, that, details don’t matter. It’s still a massive reduction. So yes, you’re, directionally you’re right on track.
[Kittle] Okay. All right, good. So it’s a refinery problem too, as well as a distribution- … And they also, I think I’ve mentioned this before ’cause I lived down on I- I lived in St. Croix for two and a half years, and Biden shut that refinery down too. that’s, one that, and it needs repair, and there were all kinds of problems with it, but that’s another one that they can go in. And I understand there are private companies trying to step in and buy and bring that back online, but that’s, a year-and-a-half process. Doesn’t happen overnight.
[Alice] So in all that on the refinery piece, can I go back down, to, We did get some comments then from Warsh this time around where I thought he was gonna, his initial comments, where he was not gonna give us any guidance whatsoever, but it seemed like we did get People are still dissecting every word that comes out, and we’re still getting a little bit of some indication of what that future might look like. So is that the case, Bill? Am I reading that right as to how this went? He gave more than he originally thought he was going to give us. And so does that mean- He- … he’s gonna be a little more open than his original plan?
[Bill] I take it a couple of ways. I think one is he understands that to get to where he wants in the level of communication, that it can’t be done cold turkey, so that he had to Make comments. He had to have the press conference even though I still feel when I’m watching his press conference, and I don’t remember what Super Bowl it was, but there was… One of the players was sitting there in the press conference, and they asked him a question, and his answer every time was, ” I’m only here because I’ll be fined if I didn’t show up.” Yeah. He really, was as evasive as he could be on all the questions. And even the one that sticks out at me the most was Mike McGee from Bloomberg, said And I’m paraphrasing, but, “Chairman Warsh you’re talking about the commitment to get inflation back down to 2%, but yet the dot plots from the other members of the Fed talk about inflation getting to 2%, in 2027.” And he’s like I can’t speak for them, and I didn’t put a dot out there,” then kinda moved on. But I also think that it was to me, a pleasant surprise for a lot of folks that it was also a 12-zero vote, and that He recovered a lot from the mixed messaging in the first press conference and, yes, to your point, Alex he made comments. He was very narrow in what he said, but basically I think his message was, ” You got a 12 to zero vote. What… I’m not gonna tell you anything more, but that tells you a lot right there.”
[Alice] Did you wanna add something, David?
[Kittle] Yeah. Trump did comment on that. Made one comment getting on Air Force One that, rates should be at 1%, I think is what he said, 1 or 1.5%, but Warsh is a great guy. So he didn’t draw any conflict like he had with- Yeah … Powell so far, but he did go and say, “This is weird.” And then getting on Air Force One or later in the day, it came out that it looks like GDP is gonna be somewhere between 5 and 5.5% for the third quarter, and which is the argument. Let me circle back just for a second. I did get some historical context here on California refineries. Pretty interesting. Since 2000, they had 23 refineries in the state of California in 2000. F- 14 at the beginning of 2024, and this is gonna drop to 11 by the end of this year. That’s what the schedule is. That’s massive cuts in refinery. We all know why, it’s California, right? Yeah. If they, had that capacity, we’d be living in a completely different world right now.
[Bill] Yeah, and I think that’s great. When you look at things like that, the part that gets totally lost in the shuffle, right? People think the pipeline networks are all over the country, and they’re really not. a tree with a very small number of branches on it, that makes a huge difference. And then for the folks in New England given the time of year, and by the way, in addition to importing diesel they im- import diesel sibling- Heating oil which is called heating oil.
[Alice] Yeah. That’s an interesting follow-up. Thank you, David. Anything to talk about with the bond vigilantes? Are they now quieted down a little bit? Is that side of it, so Les brought that up, and that’s something that people might… who wanna go look that up. There really is a segment that is going to be, of the bond market, that’s gonna be trying to push things to go their way if they don’t see the Fed reacting, which we’ve had happen in the history. Is that group gonna quiet down now after this last move?
[Bill] I think they are going to sit back quietly and smile a bit, going, ” Okay,” We’ve gotten our point across.” again, go back to what we talked about, three or four weeks ago, right? In the decade of the ’90s, 90s, early 2000s, the 10-year spent the decade basically between 4% and 5%, That’s, for a lot of folks, what’s considered a normal range. And, what the bond market has been saying is with inflation the way it is, deficits continuing to grow, that playing at the bottom end of that range is not appropriate. And so all they’ve done is push the market back to the higher end of the normal range. And to Mr. Kittel’s point if we’re gonna get a GDP print of, in the mid fours, maybe low fives, Unemployment rates at four, Just take anything else out of it. It’s kinda hard to argue that’s not a strong economy versus historical past, and that therefore rates should be, not high, but at the higher end of the normal range. And the other thing, and Matt brought this up all the, corporate side, the hyperscalers going out and borrowing long-term debt, the treasury has competition. And it’s finally there’s, competition at scale, and that’s gonna make a difference as well.
[Alice] Yeah, I thought that was a great point too, to make sure everybody was aware of that. That’s terrific. I have one follow-up question on a slightly different tone for secondary. We talked about the Vantage score last week, and then this week HousingWire had an article about this, which I thought was a good one. It was on September 18th by Clifford Rossi. Talked a little bit about the VantageScore. We’re now saying VS4 for scor- four, VS4 for short. Phew, say that four times fast. And in that, now that we’re s- there’s going to start to see more of these loans being mixed in with pools that, will we start seeing that there are caps perhaps on how much of the VantageScore can be within a pool? Will there be better pricing for pure FICO pools that are only a FICO score within that pool? Have you seen any of that start to unfold yet, Bill? Or it’s probably too soon to tell, and FICO has a 30-year history that the secondary market can rely on, and it’s gonna take a while for the VantageScore to be even close historically to what investors wanna see. So I’m interested how you think this is gonna shake out.
[Bill] So the investor side, they love predictability. And to your point, they have 30 years of FICO data, and they look at it, right? And they love predictability from two different but related perspectives. And credit score plays into both. One is credit quality but the other starts getting into life of loan duration, right? And a l– that comes down to probability of refinancing. And for years, the specified pool market has been continuing to evolve where instead of pricing set of loans with average characteristics, right? ‘Cause, averages can be very misleading. They get into looking for very specific items and, so they’ll take 100 million in loans and know, for example, that they can carve out certain pieces that the market will pay premium for, but not really get a price drop on the remainder of it. So they’re always looking for the arbitrage opportunities. And now, I don’t know that it’s worked its way through the, into the system yet, but they’re absolutely going to be first looking at VantageScores as gonna get… VantageScore is gonna get dinged for two reasons, right? One, we’ve already seen with the LLPA grids, VantageScore tends to be 20 points higher, so that’s getting adjusted for in the pricing. But the other part that they’re gonna ding VantageScore in the beginning is not really understanding how those loans, or how the prepayment characteristics are gonna change. A- so ultimately, is a pure FICO pool have an opportunity to pay better because it’s more known? Absolutely. But they’re also, at the same time, gonna be continuing to gather the data on the VantageScore and look for any and all opportunities to say, “All right, are there characteristics there that may create opportunities?” I think it’s gonna be evolving and, the other thing that’s gonna be hard for a while to tell is- I think we saw 90% of the VantageScore agency business has been done, recently been done through UWM and Rocket. That’s another question on the investor side is as you look at the idiosyncrasies are they market idiosyncrasies or are they things where UWM and Rocket’s business tends to perform a little bit differently anyway? So long-winded answer of it’s absolutely something the investors are gonna be paying attention to. And, I think lots of great ideas and speculation now, but it’s really way too early to tell what it’s ultimately gonna look like.
[Alice] Thank you. David, you wanted to add something to that?
[Kittle] Yeah, just a little bit. I’ve been around and involved, with the people that… Actually, the credit bureaus own VantageScore, which just, you know, kinda blows my mind around some of this anyway. But the reason VantageScore came about was to give a different look than FICO. FICO had been around a long time, hadn’t changed anything. The changes FICO has made in the last 10 years or whatever it is, have been forced through the fact that VantageScore is in the market with different algorithms. They look at different structures of how you pay your credit. And it was developed to bring more people into the home buying market. And I think that may have something to do with the two companies that Bill mentioned, why they use it. And it’s accepted now finally. They fought, man, they swam upstream up waterfalls for years. Baird Burns who ran that, who’s retired now- Yeah … a great friend just kept pounding and pounding the GSEs, and they finally let him in a little at a time. And I think it’s something if you want to do more loans in certain environments, the VantageScore is something you can look at. If you’re gonna lose that loan, then it doesn’t matter whether VantageScore costs more or not. If you’re gonna bring that loan in, it’s another loan you can do. Maybe you’re not gonna make as much because of it or whatever the numbers are, but it can bring more business in to you. And so I think everybody needs to look at-
[Alice] Thank you, Dave. That’s great insight. That was David Kittle, folks, CEO and co-founder of The Mortgage Collaborative. And thank you, Dave, for that insight.