[David] Yeah, I think the worrisome words there is already out of date. Matt Graham, thanks so much for your perspective and information. Good stuff. You need to sign up for Matt Graham’s MBSlive.net service. It’s very affordable. It gives you nanosecond updates on what’s going on, as well as just a plethora of information on the website. Links to the latest CNBC articles, other articles, commentary. It’s flashing on my other screen here right now all the time. Sign up for it, very affordable, and put in the code LOL when you do so. You get the extended trial period without having to put in a credit card. But just put in a credit card, just sign up for it. It’s worth it. All right, let’s get started, Bill. That’s a little bit disconcerting, especially when we’re watching the markets. We’re sitting at a 525 today. It’s we’re playing in who would have thunk, but your thoughts and reflections on what we heard Matt and Les say.
[Bill] So, I’m gonna go big picture for a minute, a little bit of a history lesson, So the, the history textbook I was thinking about when I was in high school was called From Sarajevo to Potsdam. So- In the markets, just like in history, the cause of an event and there’s the catalyst, and they’re not the same thing, The catalyst in World War I was the assassination of Archduke whoever, But the causes of World War I had been simmering for quite a while. Different alliances, we won’t get into that. We’re seeing the same thing in the markets right now. The catalyst for rates going up dramatically started back with the Iran war. But the causes of rates going up, which I think is relevant to how we got to where we are and where they’re going Iran and the oil impact is only one part of it. The real causes of rates continuing to go up are inflation- An unsustainable debt load and a lack of confidence in the entire federal government. So when people- Yeah … get to the inevitable question we’re all the way up at 525, what’s gonna change the environment, right? There’s been a lot of talk over the last couple of months that when oil drops, then that’ll pull rates down with it. The longer this has gone on, that becomes a false hope, we are in a cycle right now where, again, inflation, debt load, and a complete lack of confidence in the government, and that’s not partisan. It’s not Republican, Democrat, If you go to work in the White House or the Capitol, then the trust that the people have in you doing the right thing is as low as it’s ever been. And until all three of those things start to change, we could, Les always does the, were we gonna see 480 before 520, I would be hard-pressed right now to come up with an argument as to why we’re gonna see 5% before we see 550 ‘ cause momentum takes over and you know- We’ve got it going against us, that’s for sure. Yeah. So it, if you’re building your outlook on interest rates right now, then, there’s not a lot of good news out there.
[David] No. And what’s really interesting, Gerald, is what this is doing to the companies that have been living without that perspective that Bill just put out there. It is creating for an acceleration of mergers, acquisitions, and company closures, and we’re gonna continue to see that continue to happen as we hear and watch this play out. Your thoughts?
[Kittle] Great analogy perspective from Bill, and I mean that. That really is. So two things came to mind while Bill was talking. So if you’re… I’m speaking to the borrower right now or the realtor working with the borrower before normally it ever gets to the loan officer, right? You have to make the decision now, do you wanna buy invest in an appreciating asset, your home, or what many of them are out there, everybody’s buying, 60, 70, and $80,000 cars and trucks, a depreciating asset that depreciates heavily as soon as you drive it off the lot. And those conversations, now that’s back to structuring deals and structuring loans, and that’s where we are. It can’t just be great interest rate, gonna buy this house, and I can afford all this stuff. Now consumers are gonna have to start making choices on a long-term plan or a short-term plan, buying that car, that vehicle, whatever else it is. And then, that’s gonna drive where the market is right now, which means you’re gonna see, and you’re coming into a slowdown time anyway, which we’re cyclical in this business. Think so, We’ve said that for years, and it is. Plays out. You can document that. If it’s inflationary, how much does it slow? And yes, to your point, David, there will be more talks of merger and acquisition or just flat out, “I can’t do it anymore.” Yeah. Maybe a little cleansing again of our industry from an origination perspective where there are no relationships and it’s all been rate-driven as we’ve talked about, that gap from 2010 till now. That 16-year gap, people get in it, and it’s all for the most part for the last 14 years all been rate-driven. So I think that’s where we are right now. It’s a conversation, the initial conversation with a consumer, “I can’t afford this.” ” Let me show you how you can, but let me show You know, if you wanna build a portfolio and build for the future for your family and everything, what’s better, an appreciating asset or a depreciating asset?
[David] Yeah you make a good point. Marc, I don’t know about the parts of the market where you own real estate, but for the first time, we actually have an offer on our home in Marble Falls, Texas, and activity is picking up, and that’s even in spite of interest rates being higher, which that goes to people have to move, and it’s everyone that’s interested. I’ve been doing some research on the people that are making the offers, are talking to us. It’s people that have to make a move. They have to buy a home. They have to do it because of life circumstances. They’ve had to sell a home, and they’re moving into our area. They gotta buy a home. And we’re starting to see that activity pick up. And interest rates, while they are frustrating for them, many of them are saying, “We gotta do this one way or another. We’ll love to see rates come down,” but the better loan officers or the better advisors, realtor or loan officer, are saying, ” Probably not gonna be coming down,” to Bill’s point. So Marc, love to get your perspective on what you’re seeing out there.
[Marc] I’m certainly sitting in the middle of, right now, rural America in Florence, Alabama. David you’ll learn about this a lot in Tennessee. Is that where I now live? Yes. But I will tell you three things. We finally listed our house that we were selling ’cause we bought a new one a number of months ago, and it’s about ready to move in now. We had some work done to it. And it’s interesting. We listed it Friday. There were three showings scheduled for Sunday, and all of them happened. So even in rural America, people have gotta buy houses, yeah. But I wanted to tell you a sidebar here that I had two discussions this week that I think hit right on what Mr. Kittle was saying. I had a generator estimate for my new house. We’re in that hurricane not hurricane, but the alley where all the tornadoes come through and knocks out power- Yeah … all the time up here. And so we got a generator estimate. It’s the same company, the same size generator estimate that I got, in anticipation of buying the other house when I bought it five months ago before we started doing the work on it, and guess what? It went up 25% in cost to install. Wow. Wow. Oh, the install? 25%. so I had a conversation with the company, and they’re electrical company they do electric, plumbing, and heating, and all kind of mechanical stuff on your house, and they got all the services, all the licensed people and all. And I asked the guy, I said, “This has gotta be a joke. You’re wanting to charge me nearly $5,000 more for a generator than you gave me a quote for them five months ago?” He said, “Mr. Helm, it’s this way. We depend on new home construction and people buying homes and wanting to do things in home. Number one, new home construction is down in our area, and people buying homes are not, stopped doing the work they used to when they buy them.” He said, “You might be, but other people aren’t. And so consequently, we gotta make our margins somewhere else to keep the doors open.” Boy, if that doesn’t hit on what you were talking about a little bit, Mr. Kittel, you were talking about things like that, I said I’m finding it right here in rural America,” that’s for sure. So I think there’s a lot to be said for what customers are going through right now. And, obviously, if the rate’s higher, they’re gonna struggle to get a home and still have extra cash flow to be able to pay for the things they wanna do to it. And obviously, that’s gonna have a major effect on local businesses that have been used to doing those upgrades to homes and all. Anything from kitchen counters, to cabinets, to a new air conditioning unit or whatever the case might be. And I also have a friend who has an alarm company here, and he says their new business for people putting alarms, because it’s an ancillary charge that people don’t have to do their new business is down about 30% year over year so far of people installing alarms on houses. Now, why would that be? It’s exactly what we talked about. people can’t afford it. So the g- bad thing about rates, if rates are higher, people will buy, but it’s gonna affect on their wallet of what they do at homes in the future,
[David] Yeah. Good point. Bill, where do you see the new trading range settling in at? You’ve less talked, I don’t know if it’s daily, but nearly daily, maybe several times a day. Do you have a sense for the new trading range we’re looking at right now? I’m seeing right now that what Matt has on here is a 5.289 as the high, which we’re pretty close to hitting. What’s your thoughts on what our new trading range is gonna be? We’ve climbed through several recently, frustratingly.
[Bill] Yeah. Boy, that’s a tough one. But I’ll pick a range that I said before. I- … five is going to be really important on the downside. Yep. there’s some key technicals in that range, plus the psychological. On the upside, five and a half ’cause it’s a round number. … That’s the one thing when they start talk- Yeah … right when they start talking about the last time a rate was this high, and they’re going back decades It’s not good … not really very good. but I- I think folks are trying to figure that out, and absent any serious technical analysis, pick the round number, ’cause that’s gonna attract a ton of media attention.
[David] Yeah, good point. Mr. Kittle, I talked to different ones that are been looking at our home, in Texas, and they’re coming back to saying, “We’ve gotta make a move,” and doesn’t matter what the interest rates are at and where things are at, we are now s- getting a sense that the time is now. And so it’s, there’s an emotional momentum play in here where there seems to be momentum. Marc talked about this. Three people put a home on the market, three people come take a look at it. I’m seeing that happen now, and markets like Austin, Texas is one of those markets that are showing a good, solid sign of recovery. It may be leading on the recovery is what I heard a couple experts say over… experts. Who knows what an expert is on the real estate market these days? But it’s encouraging, some of the new trends we’re seeing even with these higher rates.
[Kittle] I’ll tell you, Austin we would say we just had a great experience there at the Mortgage Collaborative last week. We had a great conference. Very well attended. Great content. And a lot of people that are from that area of our lender members are still seeing solid loan applications. Yeah. So it is, geographic, it’s regional. Very much. Hyper local … but I’ll say, I said this last week, David, while you were off, congratulations on your wedding by the way. Thank you. And marriage- send that to me … marriage to Terri. Marriage to Terri was beautiful. Was glad I got to attend. Yeah. Glad you did. You’re welcome. Gave a great toast, too. Thank you. You’re welcome. I think that, And I mentioned this, it’s time if you’re a borrower again or an independent mortgage company, to see if you can develop a relationship someplace where you can look at a three or five-year adjustable rate mortgage and get it down- Absolutely a percent and a half. And that’s where you need to turn to. I’d be aggressive with pursuing that.
[David] Bill, you work for a bank. Are you seeing the bank come up with some new innovative products? That’s been something I’ve been hearing more and more f- about. Banks have been calling me. I’m encouraging my clients to call banks and try to set up a relationship where you can create some innovative products …
[Bill] So, the conversations are definitely starting. The folks that are really licking their chops are the credit unions. Yes. Cause As rates were dropping, Mortgage rates were approaching six I was having a lot of conversations with credit unions that wanted to get into mortgage banking, being able to originate and sell because they did not, they were not comfortable continuing to book loans in portfolio as rates continued to drop, they still have a lot of very low rate loans. They’re okay with the concentration, but they didn’t want a repeat of it. Good point … they’re looking now at being able to be a percent below the market for fixed rates, and still well north of six. That’s nirvana as far as they’re concerned. Banks are starting to look at it, right? They’re a lot more about the balancing all their different business lines. But I’ve been hitting some folks pretty hard going, there’s an opportunity 50, 75 basis points below the fixed rate that’s still a pretty attractive yield.” Yeah. Especially when you look where the cost of funds is, the spreads are really attractive. Yeah. Really attractive. And it’s gonna be a product that is gonna be bringing us, it’s gonna help spur on more activity. So I think that’s gonna be a real bad a- advantage- I do … for financial institutions, especially the credit unions, for the reasons you just pointed out. If I’m a credit union or community bank that has the appetite for some ARM product right now, they ought to be licking their chops. exactly right. This is when they can shine.
[David] So this is an opportunity, listeners, for you to start creating, getting in touch with the banks, credit unions in the markets that you are in to see if you can’t partner with them to create a product that’s unique to your operation. And this gives you some opportunities. Bill, I saw you have immediate reaction.
[Bill] Yeah. So nothing in this business ever has to be new. You just need to figure out how far back to go to find the playbook. I had three different times in the ’90s where with an IMV we created a one-off correspondent program, with a community bank. And in all three cases it was a lifeline in an environment like this where that’s what kept the company in business. There’s a way to structure it it’s a win. You can’t, as the, the seller, you can’t get greedy on the premium that you wanna make. But if it’s keeping your loan officers employed, Then maybe it’s worth it. And I was think- talking to somebody about it who’s… my cousin was a home builder remodeler, and when things got tough, he would aggressively bid jobs and break even just so that he could keep his subs employed. Yeah. Because he knew when the market turned, if he had to go out and find a whole new group of subs, he’s gonna miss the market. Yep. And it was a conscious strategy. And I think if you’re an IMB and you can find a local bank to partner with, don’t focus on how much money you’re gonna make. Focus on is it gonna keep the lights on, is it gonna keep- That’s a good question, … your good people employed- Yeah … so that then when the market normalizes, you’re positioned for it. Yeah. Great point. There’s one other thing, Dave, I wanted to throw out, that the timing of this is gonna be, interesting and, they got about three days to think about it. But, rates going up is going to significantly increase the value of folk servicing portfolio. Exactly where I wanted to go, yeah. Which is, which, and I’m curious on your thoughts and Marc’s, but I’d also caution folks that it’s a sugar high, It’s gonna feel- Yeah … really good right now. Yeah. But if rates come down, that gets undone in a hurry next quarter. Yeah. This is where managing the earning stream quarter to quarter, it’s gonna take a bunch of forethought and planning and dealing with the reality of it, not just, again, not just the sugar high.
[David] And Marc, I want to get to your thoughts on that, ’cause that’s exactly where I wanted to go, is what this is gonna do for the value of servicing. And but that’s a hedgeable risk, Bill. As if we see a rates drop, you can hedge that risk when it comes to the value of servicing. And so it is something that I’ve… and I’m, I just interviewed Chris from DovaMule, and we’re gonna be releasing that podcast. And Marc, I was really excited about his comments. We’re hearing some still some real strong prices for good servicing. The multiples were near the historical highs. But what’s your thoughts, Marc, as you look at these rates and the strategy to start retaining mortgage servicing rights, MSRs?
[Marc] I have lived more cycles of that than most humans in mortgage banking today. Yeah. And I will tell you this, I think you hit the nail on the head. a sugar high is a sugar high, but if you are smart, and you really are real smart if the rates go high, stay high, and the multiples are good, sell Because they’re not gonna be like that forever, because you’re exactly right. When the rates come down, there’ll be a run on the portfolio, and the portfolio is gonna disappear right out of your hands unless you have an internal refi unit that does a good job. And quite frankly, most small to medium sized mortgage bankers fail immensely in that category- Yeah … of protecting their own portfolio. The only people that do a really good job are the giants, ’cause they turn their telemarketers that are already, when they, their little business slacks off, they turn them loose on the portfolio- and whatnot. And, I think people like Rocket and UWM and all those guys do a, a fairly good job of portfolio protection. But I think you’re exactly right. And so if you’re banking on building your company up to sell it ’cause of the servicing value, I would hedge my bet. I would sell some and I would keep some. I wouldn’t keep it all thinking it’s gonna get it, ’cause by the time you get a deal done, your value might have just evaporated, just like Bill said.
[David] Very good point. We could keep on this topic. Mr. Kittel, as we wrap this topic up, any thoughts you want to go to.
[Kittle] No I really don’t, except what I’ve already mentioned. And servicing Was not my forte woe be it to me to counter anything Mr. Helm says, ’cause he’s the guru of servicing, he is.
[David] He is. He is. Good discussion. I want to get over to … alice isn’t with us today. She’s done a great job of hosting the podcast while I was caught up in getting married activities, and she’ll be hosting it again next week while I’m on my honeymoon in Greece. So I’m grateful for Alice, but she’s taking a much needed day off from the podcast, but appreciate it.