Full Transcript is Below:
– [Narrator] Executive leadership. Industry news makers. Top producers insights. This is NFM TV.
– Welcome into NFM TV, I’m your host Greg Sher. Trying times in the mortgage business, things changing so rapidly. We’re going deep in our playbook to bring in a foremost expert on the secondary market and the mortgage industry in general. He was on Swapbox for thirteen years, he’s the CEO of MBS Highway. You know the name, you know the face, Barry Habib, welcome into NFM TV.
– Well, thanks so much Greg, it’s always good to see you and I hope everyone is doing well. These are, these are some very unusual times, we’ll get through this, but it can be difficult and trying, especially, you know, the foremost concern is health, but also there’s a lot of confusion in the market right now. So, I will try to do my best to make some sense of that for you.
– Alright, let’s start with the FED fund rate, which was lowered to zero percent on Sunday, loan officer phones were blowing up off the hook, real estate agents wanted to know, does this mean my borrowers can get zero percent? Obviously that’s not the case, please explain the difference.
– Yeah, absolutely. Well, mortgage rates are based on mortgage backed securities, which are very different than the FED funds rate. So, the FED, when they control the FED funds rate, that’s predominantly for the banking system, which is very important, and we can talk about that for a moment too, but, first, let’s understand what the FED funds rate is. It’s a rate that one bank could charge another bank to help them with some liquidity, if they need it in the very short term. And that’s just for one day, that can change at any time after that. It’s very different than if you have a mortgage, and that mortgage could be out there for fifteen years, for twenty years, for thirty years. So, think about it from the perspective, if you were lending money. Well, if you’re lending money, and you’re gonna lend somebody money, and the interest rate that your committing to is just good for one day, and if anything in the market changes, you could adjust to that. Well, you could be a little more flexible with that. But, boy, if you were gonna commit to an interest rate to somebody that’s gonna be good for thirty years, there are other factors that you have to contemplate, and your going to be thinking about things very differently, if that were the case. You know, because if you loaned out a rate, let’s say four percent, well, if overnight rates went up, well, you can adjust that. But, if you’re on the hook for thirty years, image if rates went to five or six, and now you’re on the hook for that four percent for a whole thirty years. So, they’re very different. What I wanted to show you, Greg, was, I’m gonna bring in my screen here, because I wanna show you, very quickly, some history, and I think this adds a little bit of clarity when you think about it. So, here we go, when you take a look at the two lines, the blue line is the FED funds rate, and the red line are mortgage rates. Now, overtime they seem to trend a little bit similarly. But, let’s take a look. So, when you see here, the FED funds rate shoots up and shoots up here, what happened to mortgage rates? Well, they actually went down. And then, you can see here, FED funds rate way down, mortgage rates stayed well above it and actually went up when the FED funds rate went down. Here’s another example. FED funds rate way way down, this is going back to 2002 now, what happened with mortgage rates? They stayed pretty stable. And how FED funds rate starts going up, up, up, up, up, mortgage rates stayed pretty stable. So, as you can see, there’s not real correlation between the two that you can rely upon. And when you look at mortgage rates, even here, ten years ago, when the FEDS took rates to zero in the past, mortgage rates hovered here. Now, they gradually went down over years, not because of the FED funds rate, but because of other factors in the economy. And when you see here, even more FED funds rate started going up, up, up, mortgage rates actually went down, when the FED funds rate was going up. Now this line at the very tail here, that’s the FED funds rate shooting way down. Well, what we don’t have captured just yet, is the recent move over the last couple of days where mortgage rates have gone significantly higher. And there are many reasons for that, Greg. The reasons for the FED funds rate going higher, are because when you think about what has gone on, there’s two really big factors from what the FEDs said just recently. Number one, Steven Mnuchin in his press conference from two days ago, said something that really scared the marketplace. He did not mean to scare the marketplace, what he said is, listen, we need a package of aid to help small businesses, to help people. And trying to, you know, make his point, he said, because if we don’t, the unemployment rate will hit twenty percent. Now, I just want you to, I want to put it in context for you, the Great Recession that was all so terrible in 2007, 8, and 9, that terrible recession, we saw unemployment get to ten percent. So, twenty percent would be unbelievable. That’s depression-like numbers, where during the Great Depression, you had close to but not quite, twenty-five percent unemployment.
– Now this, Greg, this created a whole other fear in the marketplace, because now where you have the ability to say, well, I know there’ll be some delinquencies, some foreclosures, but things look to be pretty good. Should we have twenty percent unemployment? Well, then mortgages become a whole riskier item, because of possible delinquencies, and possible foreclosures. So, with anything, the riskier an investment is the more compensation you need to take on that risk, meaning, rates have to go up. Now, there’s another reason for this, as well. This aid package was so huge, in nature, in talking about trillions of dollars, 1.2 trillion, now maybe more, and in addition to that, there could be more if this thing lasts. Because if people are out of work for an extended period of time, it’s nice to give everybody a thousand dollars, but if you’re listening, how would a thousand dollars last you if no money is coming in the door. Okay? Maybe it buys you a little bit of time, but, certainly, there would be demands. And because of that, what’s happening here is you have the government giving this money out, the government doesn’t have a reserve of cash, they have to, in essence, borrow it, and go into debt. How do they do that? By selling treasuries. Now, as we learn in economics, anytime where you have more supply than there is demand on the market, what happens is, is that prices drop. So, when prices on bonds drop, the corresponding interest rate goes up, to incent people to come on in. And when you see treasuries going up in yield, what follows that is mortgage rates. And that’s why you’ve seen, over the past few days, such volatile disconnect. So, it’s gotta be frustrating, if you’re a mortgage professional, a real estate agent, a borrower, because it’s very difficult to see the rapidity of these changes, they’re unprecedented, but also a little bit difficult to kind of reconcile this. So, we see these things happening, there’s indeed even another factor. And that is, just sheer capacity. So, Greg, I’m sure you know this, but there are about 11 trillion dollars in mortgages out there. And, my son, Dan and I did a lot of extensive research on this, and we put this data out there, where we showed there is about, believe it or not, 5 trillion dollars in mortgages that could be eligible to be refinanced. Save people money, and more important than saving money, if you’re gonna refinance, do it smart, you could pull cash out, pay off your debts, accelerate the payments, take a longer term, this is how you build a sound future for yourself and your family. So, that’s another discussion. But, what happens is, is that, if you take a look at 5 trillion dollars that could be put through the system, in a great year in the mortgage industry we might do 2, 2 and a half trillion dollars in an outstanding year, half of those are purchases. So, you’re talking about 1 and a half or 2 trillion dollars in a year of refinances, how in the world can you fit in 5 trillion in, in a month or two? It just can’t be done. So, again, think about economics 101, supply and demand, overwhelming flood of business that you just can’t handle. The only way to slow it down, other than saying, hey I can’t take any more business, is to adjust pricing. It’s not gouging. It’s not gouging at all. It’s just trying to slow things down because it overwhelms the system. And this is something that you see everywhere. And overtime things should settle out, and overtime things will be okay, but for right now these are unusual times.
– Loan officers, real estate agents, we’re an impatient bunch, so, if you could look into your crystal ball, when you say, over time, is this a knee jerk thing that’s gonna last a couple of days, could it last weeks, months? This volatility that we’re seeing, how long is it gonna linger?
– So, it’s a very very smart question, a very good question, and you’ve also hit the nail on the head of what people are worried about. So, it is not going to be a short term thing. This volatility will stay with us and, you know, today we’re having a good day in the markets, after the FEDs talked about the fact that it appears that the treasury, the FED has now come up with a package that they could do to help people, and help businesses. But, you know, the crux of this is this virus. Now today, at 3 o’clock, I’m doing a Facebook Live with Dr. Mike Roizen, head of the Cleveland Clinic, to talk about, that and then break down what it means economically. But, the problem that we have is, we’re not a hundred percent sure, certainly, how long is this virus going to last and what are the implications. What we’re hearing is that, April it peaks. Now, peak doesn’t mean it’s over, peak means that it’s the worst that it gets and then it starts to get better gradually. But, that means, like, you could be in May or June and it kind of feels like it is today. Well, think about all these transactions that we’re trying to do and people are working from home, where you’re never as productive. And, you think about the environment and the economy and the real slow down that we’re seeing here. We’re already in a recession right now. So, because of this, you don’t just bounce back out of it in a few days, this is going to take some time to sort out. Now, the good news is this, longer term, will the stock market recover? Yes. Will interest rates settle down to a good level, a really attractive level? Maybe not quite the lowest ticks that we had seen, but should we be in a place where rates are very good, giving people a great opportunity? Absolutely. But, it’s going to take some time to settle out, to see the impact on the economy, the impact on unemployment, and what we’ll want to find out is, most importantly, is how long ’til we start getting back to some sort of normalcy? It is my humble opinion that that doesn’t start to happen until, maybe, end of summer, at the earliest. Because, you know Greg, we aren’t just gonna be jumping back in and hugging people, and going back to, people will still be getting sick, the numbers will be getting worse, want to try and do the social distancing, be responsible, and as we do, and things start to calm down, it won’t be an immediate rebound, but it will rebound, and, boy, when there’s a vaccination next year, then you can eradicate this bad thing. So, long term opportunity, phenomenal. Short term, we gotta just be patient, be kind to each other, do the best that we can to get through it, but we will get through it.
– I appreciate all those sentiments. Mortgage companies and real estate companies were just feeling incredible. It was gangbusters, two weeks ago, when the bond plummeted and rates went down, that one or two day period, all of a sudden now the world, as we’ve talked about, has changed. So, whereas, the companies were forecasting purchases to be eighty percent of their volume, ninety percent of their volume, now suddenly we’re in a world where people may not wanna go into houses, to appraise homes, we’re already getting some rumblings on the street that some appraisers don’t wanna go out, and we’ve got the title companies that aren’t that comfortable, I mean that, all the links in the chain go on and on. So, with that in mind, how do you see that mix changing? Do you think purchases are just gonna dry up completely?
– Another great question. And you’re right, purchases have to slow down, they have to. Because out of all the things you said, and then have the customers themself, do I want to go visit a home that potentially could be infected? If I’m selling the home, do I want people traipsing through can could potentially be infected? So, this will slow things down for a couple of months here, at least. Where you will not see the activity that we’re accustomed to. So, what does this mean? You look at fundamentals. The simple fundamental that exists is there are too many buyers and not enough properties. This respite that will take place, in a very odd way, could actually be an opportunity, because if you do brave the elements, if you do put a transaction together, you’re not gonna be outbid like you have been for the past six months, you’re not gonna be looking at less opportunities out there. So, I’m not suggesting that people do this or don’t do this, everybody has their own tolerance levels, but what I am saying is that, this will pass, and then when it does, we go back to the fundamentals, and the fundamentals were, too many buyers, not enough inventory, that’s where we are right now, that’s where we will be in a few months from now, and that means the housing market will recover and will be very very healthy, as long as we don’t get a sustained and prolonged very high rate of unemployment. But, the government is trying to do what we can, the economy will rebound. So, if your mindset is, do I want to trade something quickly? Well, real estate, probably not the place to be. Do I want to take a look at, will my home value hold up in two years from now, three years from now, will I look back and say, wow the values in two years from now be a lot higher than they are today? Yes, they will.
– What about lenders, Barry, out there? We’re seeing some banks halt locks, there’s some concern, looking at some of the smaller players, stock prices plummet and plunge. Do you think that there’s gonna be some carnage left behind on the lender side? What do you think it’s gonna look like?
– Well, you know, it’s very hard to predict. But, I will tell you this, you know, you said that lenders were feeling good when originations were so plentiful, on the origination side, as you know they were, but, I think what originators need to know, what I think real estate agents need to know, and what consumers need to understand, is that it’s not all fun. Because, when a company, in the mortgage process, is a large company, what they often do is they service transactions. So, what does servicing mean? I know you know, but just explain to everyone. It means that you’re acting, so to speak, like a superintendent in an apartment building. So, therefore, what you are, what you’re doing is you don’t own the asset, because nobody holds the mortgage, that’s all sold off into the secondary market and eventually purchased by all of us on this call, if you look in your mutual fund, your IRAs, your 401Ks, we’re the ones that take the risk on this risky asset, as it goes through the system. But, everybody takes a piece along the way. And what a servicers job to do is, collect the payments, pay your taxes, pay your insurance, send you a nasty note if you’re late, answer your questions, tell you what the balance is, that’s what, they service the loan. Now the value of that servicing has been reduced. Why? Because the way it works is, let’s just use some round numbers, say the value of servicing is one percent, that’s what it would be worth. Well, you get a fee for that servicing, so you buy the service, and you pay one percent, now I have servicing ability. But, what I collect, is I collect, let’s call it .3, .4 of one percent on that loan. Which means it will take me about two and a half to three years of collecting payments before I’ve recovered my investment. It’s kind of like if you’re a customer, and you say, hey, you know, I want a lower rate, so I want to pay three points and bring my rate down. Well, that sounds good, but, your upfront investment, it takes a few years, three years, four years, for the savings every month to recover your investment, and then pay off in the long run. It’s the same thing with servicing. Most of the time, that servicing lasts for seven years, six years, eight years, whatever it is. So, it’s a very good business. But, with everybody having refinanced, those loans are paying off very quickly. So, the upfront investment is not being recouped, and therefore there’s a lot of losses. Now, that has a cascading effect on it. And if you think about the way our locking system works, our locking system cost a lot of money too. Because what you do, when you lock a loan, it’s not like somebody magically locks it in outer space, well, that is a promise from a company, to a borrower to say, I will promise to deliver this loan at such and such a rate. Until that loans closed they can’t do that. So, they don’t wanna gamble. What they do is, essentially, they do something, which is kind of like buying insurance, buys insurance to say, if rates get worse, the insurance policy will go up in value enough so I can buy enough of that rate down to the rate I promised you. And that works nice. But, even if rates go down, like they did, and this was dangerous, when rates go down so fast, that insurance policy now has a negative value. And while you might say, oh okay so it’s a negative value there, but I’m getting more gain to have a positive value on the value of the loan. The insurance company, essentially, says, sorry, we know that, on paper it’s good, but we need our money first. So, there’s a timing or a handshake issue, which causes cash constraints for many lenders, banks, mortgage companies out there in the interim. And this is why we have such a volatile level of disruption. So, this is a time for us to be understanding. Nobody’s trying to gouge, nobody’s trying to. People are just trying to find out what’s going on here and survive. So, we all need to have a little grace here, and get through this period.
– I love that explanation, thank you. And, also, people need to understand that it’s not the individual correspondent lenders that are setting the rate. Because of the things that you just described big run off in servicing, and the volatility in the market, lack of appetite for loans, they are giving lenders higher rates. That, then they need to push out to the markets. So, there’s definitely, like you said, a cascading effect. Just in our last moment or two, Barry, anything else you want to touch on? And then also, love to know how people can follow you.
– We do, through MBS Highway, and our subscribers have been very happy. And, I don’t know if you watch me on CNBC or Fox, but I am sorry to say, I am very sorry to say, that we accurately forecasted all this, we forecasted a recession before this. You can pull up the clip on Fox, when the S&P was at 3200, I said, look, if it closes below, my exact words, if it closes below 3019 on the S&P, I said look out below, the number I put out there a while ago, for everybody, when the S&P was at 3200, I said 2350 on the S&P, everybody thought I was nuts, We hit 2350 yesterday, now my number on the S&P is like 1810, I think that it’s very possible that we get there. I’m sorry to give such a bearish forecast, but I was the only one that forecasted an interest rate, you know this Greg, I put this all out there last year, saying that, rates before corona, when people thought corona was a beer, that it would hit 1.37, it did. When the corona virus came, I said it’s going to one, it did. On Fox, you can see, they gave me accolades, said, where to now, I said, it’s going to a half, it did. And where we see rates right now, is trying to find their ground. But, I will tell you, that I believe that interest rates, after this settles out, will begin their trend a little bit lower, I don’t know if we get to those low low levels that we’ve seen, but I think they will. Greg, I wanna show you one more thing on my screen here.
– [Greg] Sure.
– Just so you can see the level of volatility. Now, this is mortgage backed securities, and each intraday level is the craziness that you’re seeing. These are unbelievable swings. This is normal. Mortgage market normal moves. This is a big move, you see this here, this is a big intraday move, up and down. Big move, big move. This is a gigantic move here. But look at how it’s dwarfed by the activity that we’ve seen of late. The market is, truly, in a crazy state of turmoil. And as prices go up, usually rates go down. You wanna look at rates? Let’s look at the ten year treasury. The ten year treasury will give you approxes. You can see we’re doing good. Rates are coming down, down, down. But now look at what rates have done in the past week or so. They have skyrocketed higher, from a low of 0.4, to, essentially, tripling, to 1.2. So, yields on the ten year treasury have tripled, higher. And this is where we are now, just trying to find some stability. When we take a look at the stock market, cause I know many of you are worried about your holdings, let me just kind of put this in perspective for you, okay. So, I’m gonna pull up a little longer timeframe just to give you perspective. Now when we take a look at this, and we say, okay where is the S&P going? Well, we’ve just begun starting to see the data, we’ve just begun seeing that. When the S&P was here, right here, at 3200, this is when I said we’re going to 2350. Why did I say 2350? Because that is exactly this bottom here that you see. And when I said that on Fox, when I said that all over, look at where we hit yesterday, we actually broke a little bit underneath it. Why am I saying 18? Because that’s right here is 1810. And this is where we were in the beginning of 2016. I believe that the slow down in economic activity and the numbers you’re gonna start to see, and the unfortunate things that are gonna happen to companies, their employees, and the overall business world, will probably cause the stock market to come down to this level. But, I will tell you this, whether it goes below this or not, over the long haul, I think you’ll look back and think this was an amazing buying opportunity. So, those are the final thoughts there, but from the heart, I wish everybody health and safety. Be good to each other at this time, you know, these are really trying times and this is where you show your character, this is where you show what you’re made of, you know, and this is where you show loyalty. Loyalty doesn’t mean, in the good times I’m your friend. Loyalty means, I’m there for you when times are tough. Well, they’re a little tough now, they’re gonna get tougher. But, this is the time to show what you’re made of. This is the time to show grace, kindness, loyalty, and we will get through this, and there will be great opportunities up ahead.
– Barry, how can people follow you?
– Well, if you want to, obviously, on Facebook, on LinkedIn, you can just find me, you can just put me in there. But MBS Highway really if you’re not a member of MBS Highway, I think you could’ve avoided all this because, you just ask anybody, just look at our social media, everybody’s saying how we beautifully navigated this. They’re probably way too kind to me, but they are. If you’d like to, there are more turbulent times ahead, and listen, the old saying, the best time to plant the tree was twenty years ago, the second best time is today. So, please don’t miss the opportunity. Get on board with us and know what’s going on, know how to navigate, and know how to guide others through it.
– Alright, Barry Habib, CEO of MBS Highway. We really appreciate all of this great knowledge you’ve dropped on us here at NFM TV. I hope we can catch back up with you here in the near future as things continue to unfold.
– Alright, take care Barry.