Mortgage Pricing Insights (JUNE 2020)...MORTGAGE RATES –Cont’d. 6 | MORTGAGE RATE FORECAST AD&Co...

Mortgage Pricing InsightsJUNE 2020

© 2020 Optimal Blue, LLC and Andrew Davidson & Co., Inc. (AD&Co). All Rights Reserved.

CONTENT OVERVIEW

2 |

Mortgage Pricing Insights: June 2020

INTRODUCTION PG. 3

• MORTGAGE PRICING INSIGHTS REPORT SUMMARY 3

• MAY MARKET OBSERVATIONS 3

MORTGAGE RATES PG. 4

• MORTGAGE RATE SUMMARY 4

• MORTGAGE RATE SPREAD TO TREASURIES 4

• PRIMARY TO SECONDARY YIELD SPREAD 5

• PRIMARY MORTGAGE RATES VIA OBMMI™ 5

• MORTGAGE RATE FORECAST 6

PRIMARY MARKET PG. 7

• LOAN ORIGINATION VOLUMES 7

• ORIGINATIONS BY PRODUCT 7

• BORROWER CREDIT BY PRODUCT 8

• LENDER PIPELINE PULL-THROUGH 8

• BEST-EFFORTS VS. MANDATORY SPREAD 9

• WHOLE LOAN VS. MBS PRICING 9

SECONDARY MARKET PG. 10

• MBS NOMINAL SPREADS TO THE 10-YR. TREASURY 10

• NOMINAL SPREAD & OAS HISTORY 10

• MBS CC OAS TO SWAPS 11

• 30-YR. MBS EMPIRICAL DURATIONS 11

• EMPIRICAL VS. IMPLIED VOLATILITY 12

• CORPORATE CREDIT MARKET HIGH-YIELD SPREADS 12

• GSE CONFORMING MORTGAGE CREDIT CONDITIONS 13

SOURCES & REFERENCES PG. 14

• ABOUT OPTIMAL BLUE, LLC AND ANDREW DAVIDSON & CO., INC. 14

LEGAL DISCLAIMER PG. 15

MORTGAGE PRICING INSIGHTS REPORT SUMMARY

Optimal Blue and Andrew Davidson & Co., Inc. (AD&Co), a leading provider of risk analytics and consulting for

residential lending and MBS, have partnered to deliver the Mortgage Pricing Insights report. Released

monthly, this report leverages proprietary data and analytics produced by both firms to provide a

comprehensive view into mortgage finance across the primary and secondary markets. Each robust report

includes updates to critical mortgage metrics like rates, yields, volumes, and prepayments, and also highlights

the most relevant trends in the mortgage industry. For access to the data and analytics displayed herein,

please contact Optimal Blue and/or AD&Co through the contact information provided on page 14.

MAY MARKET OBSERVATIONS

• The financial markets continued to edge away from the precipice of the worst stress since 1929. Federally-

connected mortgage markets improved in sync. Spreads moderately tightened and mortgage production

and housing prices remain surprisingly healthy. However, historically wide spreads persist. Credit is tighter

and non-government mortgage volume remains challenged.

• Primary and secondary mortgage markets continued to recover from the blowout in spreads to Treasury

that occurred in mid-March, as a result of the economic turmoil caused by COVID-19. Treasury rates were

unchanged during the month, while primary mortgage rates fell 8 bps to 3.23%. The historically wide gap

between primary mortgage rates and the 10-year Treasury of 291 bps continued to manifest in mid-March

(spread averaged 210 bps during Jan./Feb. ‘20) and contracted by just 9 bps in May to close at 258 bps.

• Historically low mortgage rates and loosening of COVID-19 restrictions drove originations higher in May.

Total rate locks grew by 11% month over month (MoM), up nearly 75% from May 2019. Rate/term refinances

showed no signs of slowing, with volumes over 3 times the prior years’ totals. Conforming loans kept a

dominant share of production with nearly 75% of new rate locks; up from approx. 60% pre-pandemic.

• Due to uncertainty stemming from the Federal forbearance policy, lenders continue to tighten credit. May

saw average FICO scores climb again, with the largest increases in FHA and VA loans.

• Lender pull-through rates have settled in at historical averages near 80%, providing welcomed stability to

pipeline managers. Loan pricing also improved relative to MBS in May, delivering gains for originators.

• The spread from primary mortgage rates to MBS yields in the secondary market fell 21 bps during the

month but remains historically high. The nominal yield spreads of MBS to Treasuries in the secondary

market ticked up 13 bps to 100 bps but remain well below the recent peaks that resulted from large-scale

Fed purchases. MBS OAS levels widened modestly by 8 bps.

INTRODUCTION

3 |


MORTGAGE RATE SUMMARY

MORTGAGE RATE SPREAD TO TREASURIES

The 10-year Treasury traded in a tight 10 bps range during May and finished the month up 1 basis

point at 0.65%. After opening the month at 3.31%, the 30-year conforming mortgage rate

dropped 8 bps. Oscillating between 255 and 271 bps, the mortgage rate spread to Treasury

finished the month at 258 bps, well above its long-term average.

SPREAD TO TREASURY

Open: 267 bps

Close: 258 bps

Average: 262 bps

Min: 255 bps

Max: 271 bps

MORTGAGE RATES

4 |

Source: Optimal Blue Mortgage Market Indices™

(OBMMI™) — optimalblue.com/obmmi

U.S. Department of the Treasury — treasury.gov


1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Spre

ad

Rate

s

Spread 10-YR Treasury OBMMI 30-YR Conforming Rate

Source: Optimal Blue Mortgage Market Indices™ (OBMMI ™) — optimalblue.com/obmmi

AD&Co Analytics — ad-co.com

March 20, 2020 was chosen to highlight effects of pandemic.

http://www2.optimalblue.com/obmmi

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield


https://www.ad-co.com/

MORTGAGE RATES – Cont’d.

5 |

PRIMARY TO SECONDARY YIELD SPREAD

The mortgage rate spread to MBS remains very high, but it has tightened 33 bps from the 191-bps

peak in mid-March. Originators report high profits per loan, though risk is elevated in several areas.

Financing costs, hedging costs, and delivery uncertainty due to forbearance are all up; servicing

values are way down, and loan-processing capacity is constrained by the pandemic.

PRIMARY MORTGAGE RATES VIA OBMMI™

Federally-connected mortgage rates continued to decrease in May as primary market spreads

tightened slightly from decades-wide levels, while Treasury bond rates remain at 100-year lows.

Jumbo rates remain elevated due to a lack of secondary market liquidity for non-agency products.

MONTHLY RATE AVERAGES

(MoM)

30-YR. Conf.: 3.29% (-11 bps)

30-YR. Jumbo: 3.50% (-14 bps)

30-YR. FHA: 3.36% (0 bps)

30-YR. VA: 2.98% (-5 bps)


2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Mort

gage R

ate

s

30-YR Conforming Rate 30-YR Jumbo Rate 30-YR FHA Rate 30-YR VA Rate

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Prim

ary

Secondary

Spre

ad



Bloomberg L.P. — bloomberg.com

Source: Optimal Blue Mortgage Market Indices™ (OBMMI ™) — optimalblue.com/obmmi

PRIMARY SECONDARY

SPREAD

Open: 179 bps

Close: 158 bps

Average: 169 bps

Min: 158 bps

Max: 177 bps


https://www.bloomberg.com/


MORTGAGE RATES – Cont’d.

6 |

MORTGAGE RATE FORECAST

AD&Co forecasts spreads to tighten from the current wide levels. Mortgage rates will otherwise

follow the path of Treasury rates; rising along the forward curve or falling based on the current curve.


RATE FORECAST (PSS)

3 months: 3.20% (155 bps)

6 months: 3.17% (152 bps)

12 months: 3.13% (148 bps)

Source: AD&Co Analytics — ad-co.com


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20

Pro

duct

Share

Conforming NonConforming FHA VA USDA

LOAN ORIGINATION VOLUMES

Purchase rate lock volumes recovered from a slow April, growing by 34% MoM. This growth is a

positive sign for the real estate market as the economy reopens. Refinance originations continue at

a torrid pace as borrowers take advantage of the current rate environment and, in the case of cash-

out refinances, stow money away to compensate for potential loss of income in the near future.

ORIGINATIONS BY PRODUCT

Product mix for new originations was little changed from April to May. Conforming loans maintain

dominant market share as the 2020 refinance boom continues. Non-conforming product

origination, primarily Jumbo loans, remain depressed due to widespread credit tightening due to

the economic havoc created by the pandemic.

3.0%

3.2%

3.4%

3.6%

3.8%

4.0%

4.2%

4.4%

4.6%

0

50

100

150

200

250

300

350

400

450

Rate

Index

Valu

e

Purchase Cash Out Refi Rate/Term Refi OBMMI 30-YR Conforming Rate

PRIMARY MARKET

7 |




Optimal Blue Market Analytics —

optimalblue.com/market-analytics

VOLUME CHANGES

MoM, YoY

Purchase: +34%, +2%

C/O Refi: -12%, +55%

R/T Refi: +4%, +341%

Total: +11%, +74%

PRODUCT SHARE

(MoM)

Conforming: 73% (-106 bps)

Non-Conforming: 4% (+41 bps)

FHA: 10% (+49 bps)

VA: 12% (-12 bps)

USDA: 1% (+28 bps)

Source: Optimal Blue Market Analytics —



https://www2.optimalblue.com/market-analytics/


PRIMARY MARKET – Cont’d.

8 |

BORROWER CREDIT BY PRODUCT

Borrower credit tightened in May, continuing the trend followed since the onset of the pandemic.

Lender overlays that were meant to minimize fallout risk from forbearance risk have kept low credit

score borrowers on the sidelines. With no shortage of refi volume coming from lower risk

borrowers, lenders are likely to maintain these higher standards.

LENDER PIPELINE PULL-THROUGH

Originator pull-through rates converged for purchase and refinance loans in May at a benchmark

80% level. This is another positive sign after the heavy pipeline turmoil in March, which resulted from

an excess of originations and the social distancing requirements caused by the onset of COVID-19.

PULL-THROUGH

(MoM)

Purchase: 81% (+152 bps)

Refi: 81% (-184 bps)


AVERAGE FICO

(MoM)

Conforming: 758 (+3)

Non-Conforming: 766 (+4)

FHA: 672 (+5)

VA: 720 (+6)

USDA: 701 (-1)

Source: Optimal Blue Market Analytics —


Source: Optimal Blue Hedge Analytics —

optimalblue.com/hedge-analytics


https://www2.optimalblue.com/hedge-analytics/

BEST-EFFORTS VS. MANDATORY SPREAD

The spreads between best-efforts and mandatory delivery narrowed in May after spiking at the

onset of the COVID-19 pandemic. While this is a positive sign of stability, spreads remain elevated,

a signal that significant uncertainty remains in the secondary market.

WHOLE LOAN VS. MBS PRICING

Compared to MBS, investor/aggregator pricing is still deeply discounted, but it is improving

particularly for government loans. Fed purchasing has driven up the price of MBS, but whole loan

pricing did not follow suit, as market volatility and concerns about forbearance instigated wider

margins for aggregators.

PRIMARY MARKET – Cont’d.

9 |

SPREAD CHANGES

(MoM)

Best Ex vs. UMBS: +21 bps

Best Ex vs. GNMA: +243 bps

Cash Window vs. UMBS: +21 bps




BEST-EFFORTS VS.

MANDATORY SPREAD

(MoM)

30-YR. Conf.: 85 bps (-11 bps)

30-YR. VA: 68 bps (-60 bps)

30-YR. FHA: 118 bps (-40 bps)

Spreads indexed to zeroon February 3, 2020.





MONTHLY SPREAD AVERAGES

(LAST MONTH)

Nominal spread: 94 bps (112 bps)

OAS: 59 bps (71 bps)

MBS NOMINAL SPREADS TO THE 10-YR. TREASURY

Nominal MBS spread to Treasury is 100 bps, 41 bps tighter than in mid-March after the Fed began

to buy MBS in size but remaining near the highs for the last seven (7) years.

NOMINAL SPREAD & OAS HISTORY

Both nominal MBS spreads and OAS have tightened by 40 bps since their generational peaks

observed in mid-March, remaining historically wide.

SECONDARY MARKET

10 |


MBS NOMINAL SPREAD

Current: 100 bps

Average since May 13: 75 bps

Minimum since May 13: 57 bps

Maximum since May 13: 141 bps





DURATIONS

FN&UMBS 2.5%: 2.9

GNII 2.5%: 3.6

FN&UMBS 3.0%: 1.4

GNII 3.0%: 1.1

MBS CC OAS TO SWAPS

MBS OAS have tightened by about 40 bps since the middle of March to 61 bps but remain

extremely wide over the past seven (7) years.

30-YR. MBS EMPIRICAL DURATIONS

Mortgage rates are under 3.5% and spreads are expected to tighten if the economy stabilizes.

Empirical durations, which are depicted below, show what investors are willing to pay for additional

mortgage yield. Expectations are that prepayment speeds for premium mortgages will be very

high. While rarely reported on market monitors, there is non-trivial production of 2.0% coupon

mortgage pass-throughs.

SECONDARY MARKET – Cont’d

11 |


OAS SPREAD

Current: 61 bps

Average since May 13: 27 bps

Minimum since May 13: 2 bps

Maximum since May 13: 101 bps





CORPORATE HIGH-YIELD

SPREADS

March 20: 1087 bps

May 31: 654 bps

EMPIRICAL VS. IMPLIED VOLATILITY

Empirical volatility is measured by weekly changes in a 60-day moving average for a 10-year swap

rate, annualized. Implied volatility used in MBS OAS calculations has recently been well below

realized volatility. The two series have been quite close to one another over the 23-year period

(average: 0.90% implied, 0.92% realized). Empirical volatility has been exceptional since March;

however, looking forward, implied volatility suggests the market is anticipating more stability.

CORPORATE CREDIT MARKET HIGH-YIELD SPREADS

Spreads in the corporate sector widened dramatically in March and have now tightened 432 bps

from the earlier 2020 highs. Mortgage rates, funding costs, and corporate credit spreads increased

similarly, but have moved marginally lower over the last month.


12 |


CURRENT VOLATILITY

Implied: 0.56

Empirical: 1.04




Federal Reserve Economic Data (FRED) | Federal

Reserve Bank of St. Louis — fred.stlouisfed.org



https://fred.stlouisfed.org/


13 |

GSE CONFORMING MORTGAGE CREDIT CONDITION

Market implied GFees are derived from CRT prices using three factors: (A) expected loss, (B) price

of unexpected risk, and (C) technical spread. Recently, the largest changes in implied GFees are

driven by technical spread, which has gone up multifold due to CRT forced liquidations, while the

fundamental loss expectation component has increased 2-3 times. Implied GFees have trended

lower since their peak in March but remain historically high.


GFEES

3M average CAS I-GFee: 57

3M STACR I-GFee: 59

3M 60-80 LTV I-GFee: 56

3M High LTV I-GFee: 59



ABOUT OPTIMAL BLUE

Optimal Blue’s Marketplace Platform connects the industry’s largest network of originators, investors, and

providers. Nearly $2 Trillion of transactions are processed across the platform each year, facilitating a broad set

of secondary market interactions like pricing, locking, hedging, and trading of mortgage loans. For more

information, please visit www.optimalblue.com.

DATA CONTACT FOR OPTIMAL BLUE:

Brennan O'Connell, Data Solutions Manager

[email protected]

ABOUT ANDREW DAVIDSON & CO., INC.

Andrew Davidson & Co., Inc. (AD&Co) was founded in 1992 by Andrew Davidson, an international leader in the

development of financial research and analytics, mortgage-backed securities product development, valuation

and hedging, housing policy and GSE reform, and credit-risk transfer transactions. Since its inception, the

company has provided institutional fixed-income investors and risk managers with high quality models,

applications, consulting services, research, and thought leadership, aimed at yielding advanced, quantitative

solutions to asset management issues. AD&Co’s clients include some of the world's largest and most

successful financial institutions and investment managers. For more information, please visit www.ad-co.com.

DATA CONTACT FOR AD&CO:

Rose Barnabic, Director of Mortgage Banking

[email protected]

SOURCES & REFERENCES

14 |


http://www.optimalblue.com/

mailto:[email protected]?subject=MPI%20Report%20Inquiry

http://www.ad-co.com/

mailto:[email protected]?subject=MPI%20Report%20Inquiry

LEGAL DISCLAIMER

15 |


DISCLAIMER

Optimal Blue, LLC and Andrew Davidson & Co., Inc. (each a “Party” and together the “Parties”) believe this

publication (the “Mortgage Pricing Insights” report) to be reliable, however its accuracy, completeness,

timeliness, and suitability for any purpose are not guaranteed. All opinions are subject to change without

notice. Nothing in the Mortgage Pricing Insights report constitutes: (1) Investment, legal, accounting, tax, or

other professional advice; or (2) Any recommendation or solicitation to purchase, hold, sell, or otherwise deal

in any investment. The Mortgage Pricing Insights report has been prepared for general informational

purposes, without consideration of the circumstances or objectives of any particular investor. Any reliance on

the contents of this publication is at the reader’s sole risk. Neither Party is responsible in any manner for any

damages whether direct, indirect, special or consequential, howsoever caused, arising out of use of this

content, or reliance on the information it contains. All investment is subject to numerous risks, known and

unknown. Past performance is no guarantee of future results. For investment advice, seek a qualified

investment professional. NOTE: An affiliate of Andrew Davidson & Co., Inc. engages in trading activities in

securities that may be the same or similar to those discussed in this publication.

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TRADEMARKS

All services names, product names, company names, and logos used in this report are trademarks or

registered trademarks of their respective owners.

COPYRIGHT

© 2020 Optimal Blue, LLC and Andrew Davidson & Co., Inc. (AD&Co). All Rights Reserved.

REVISIONS

The Parties may amend or revise these disclosures at any time without notice.

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