August 5, 2021

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Mortgage News

How the bond market impacts mortgage originators

After months of low interest rates, there have been recent shocks in the bond market. HousingWire recently sat down with Scott Happ, President of Secondary Marketing Technologies at Black Knight, to discuss the impact on mortgage lenders and investors.

HousingWire: How are the recent bond shocks affecting the real estate recovery in the industry?

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Scott Happ: After around nine months of extraordinarily low and stable interest rates, we saw a significant sell-off in the bond market, due to the expected end of the pandemic and the improvement in economic activity. The combination of an increase in inflation expectations and higher real yields has resulted in mortgage rates increasing by around 0.5% since the end of the year. The bottom line, however, is that interest rates are still extraordinarily low, and I don’t expect this modest rise in interest rates to have a noticeable detrimental effect on the property market. Of course, at current interest rates, there are now slightly fewer refinancing candidates than there were a few months ago.

HW: How does this in turn affect mortgage lenders and investors?

SCH: I think both originators and investors understand that the high volume of refinancing we have seen over the past year will eventually wear off, and they are already considering how to compensate for this change, whether it is sudden or gradual. The real estate market is robust, so one strategy is to shift resources to the buying market. Of course, as anyone who has gone through a mortgage cycle knows, at some point refinancing activity will slow down and the industry will face a period of excess capacity. Regardless of the environment, we believe the benefit for those with robust data sets and analytical skills is to optimize pricing and production strategies with exceptional granularity.

HW: What can originators and investors do to prepare for future market volatility?

SCH: During the market disruption last March, we found that companies with both resiliency and agility built into their models were better able to change, resist, and pivot as conditions changed. These are the preparations that require forethought and commitment before misfortune or unexpected change occurs. A big part of that is diversifying counterparty risk. For example, companies that hedge with TBAs have benefited from multiple primary and broker-dealer relationships. Firms that had multiple strategies in place for executing loan sales, including agency sales, securitisations, and service retain / release flexibility, also performed better. With these relationships in mind, it’s important to get real-time insights from massive amounts of data from all of these counterparties for optimal use and positive impact on the bottom line.

HW: How is Black Knight helping lenders with these challenges?

SCH: Black Knight’s acquisition of Compass Analytics and Optimal Blue has brought together the two leading providers of secondary marketing technology and advisory services in the mortgage industry. Now you can access a powerful combination of pricing intelligence and automation, hedge advisory and analytics tools, sell-side and buy-side automation, and cross-market data and analytics through a trusted, world-class financial technology provider. These solutions and services are backed by the seasoned Black Knight professionals who share their collective knowledge, expertise and insights with clients on a daily basis.