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July 2019

Interest Rates & Origination: Market Insights Q&A

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As noted recently by Deutsche Bank, the market proves quite terrible at predicting interest rate movements, with the first half of 2019 being no exception. And while we are not in the business of predicting interest rates, our team of institutional sales strategists meet weekly to discuss the state of the primary and secondary markets, the current market pressures that our clients face, and what strategic insights we can provide to help them. 

Here are some key insights from our most recent strategy sessionand we look forward to sharing more in the future!

What factors drove the rate drops?

Slowing economy, weaker-than-expected metrics (GDP,CPI, etc), and projected recession in the next 12-24 months. This allowed the Fed to keep key interest rates flat to lower in order to keep the economy humming. Finally, the treasury curve is greatly influenced by traders along the various tenures which then allows for the deployment of thoughts/policies/projections into the actual marketplace. Markets are bid upwards, thus driving yields down…thus trickling down to lower cost of funds and overall financing rates.


From my perspective inflation is the key metric that determines the direction of interest rates. The data behind the inflation number such as leading indicators, jobs report, housing and geopolitical events (i.e. China trade talk) all contribute to the direction of inflation. Inflation has yet to consistently remain above the feds 2.00% + mandate since 2008 , despite low unemployment and the best job market In over a decade. The quantitative easing that followed the 2008 financial crisis did little to repair the abuses that took place in the earlier 2000’s. Until the excesses have been eliminated, inflation as well as rates will remain depressed. Recessions have a way of wringing out the excess and creating a hunger to get the economy back on track. It will be painful, for some more than others. In a nutshell, lack of inflation sits as the main cause for rates to decline and remain low. Why inflation remains low despite low unemployment, and what was strong global growth could be debatableHowever, clearly overall supply in the global economy is overshadowing demand.

What impact do you see for residential lenders and originators?

The lower interest rates in the past few quarters have allowed millions of borrowers to potentially refinance debt from as early as 12-24 months ago. This mini-refinance “boom” will allow independent mortgage originators to utilize their built-in scale as well as redeploy resources that have been shelved in the past 6-12 months. More importantly, this refinancing opportunity will allow smaller, more margin-sensitive participants, to stay a bit longer in the origination game while re-tooling strategies going forward. The refinancing opportunities can take various forms—traditional 1st lien refinances, 2nd lien piggy backs and HELOCs. Finally, given the rise in property valuations over the past few years, this rate market is poised to add “fuel to the flame” to the housing market. A positive housing market is only beneficial to the independent mortgage originator.      

How would traditional banks and credit unions look at this environment, particularly as it relates to their securities versus loan investment decisions?

They are not excited about it. I’m sure every ALM (Asset Liability Management Committee) lookvery closely at all aspects of their business lines and the level of risk each dollar is exposeto, versus the return that dollar brings in. Both banks and the surviving credit unions have become very healthy over the past 10 years and protecting that recovery is priority number one. They will continue to take some risk out on the curve depending on the market they serve. They will take advantage of unique opportunities that arise (i.e. e-commerce economy). But their investment portfolio will be considerably shorter and fees will be increased where possible. Their cash run-off will also pick up and finding reinvestment opportunities will be tricky. Most will take a bullet and buy way more treasuries than they would have or payoff debt, even if it is a non-revenue generating asset and quite frankly, pray the recession lasts a traditional (6 to 18 months) duration. 

What opportunities do you see in the secondary market to leverage the current rate environment?

Portfolios will run off—especially residential mortgages. PMs will need to replace with like-kind (albeit at lower coups, longer duration). PMs may look at alternatives that better fit their duration and yield bogies. Originators will write more traditional loans but also leverage lower rates to write 2nds as well as HELOCs. Banks should be better buyers of assets in general as residential portfolios may run off and/or prepay and thus will/should look at other assets. Banks may become sellers of higher yielding assets given new and lower rate environment (this will be a hard pitch) but correct in theory. Banks may want to look at non-QM given higher yields and to address their residential portfolio needs.


On the investment side Float-to-fixed, adjustable rates, and variable rate products would be in play. Quality fixed rates are all expensive. As of this morning:

15-YRFIXED   3.500 

10-YIELD          2.060

30-YIELD         2.562
Corporate bonds historically have a spread between + 50 to 100 over treasuries, Agencies +25 to 40 and those spreads have tightened dramatically over the past two years. The 15 year fixed mortgage (new) has +94 over the 30 year treasury and +144 over the 10 year treasury. When comparing investment choices to compliment your loan portfolio, fixed residential/commercial whole loans continue to be cheaper on a relative basis to securitized loans backed by Fannie, Freddie or Treasuries. Either writing mortgages or participating in loans should remain robust given overnight or term rates that are currently available.
Tony Mun is a consultative executive with varied experiences within the whole loan spectrum. Tony is able to employ a unique view point as a result of his deep-rooted understanding of the legacy brokerage models. It is his goal to help frame an illiquid, non-transparent and misunderstood marketplace via a unique technology platform.
Stackfolio is an online marketplace for loan trading and participations between financial institutions. Click here to visit the Stackfolio Marketplace.

Why HELOCs Should Be On Your Radar

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In a market with rising home values, increasing interest rates, and homeowners reluctant to refinance or sell, many homeowners turn to home equity lines of credit (HELOCs) to meet their financing needs.
This means HELOCs should continue to be an attractive and growing loan product offered by originators.
Why are borrowers using HELOCs?
  1. Cheaper. HELOCs can be a cheaper alternative than other common forms of borrowing such as credit cards or unsecured personal loans.
  2. Versatile. HELOCs give borrowers a lot of options for how to use the funds. Whether it’s paying off credit cards, debts, or making home improvements, they allow homeowners to borrow smart.
  3. Not The Same as it Used to be. Many recall a very different borrowing and lending structure of HELOCs from prior to the financial crisis of 2008. Today, however, lenders have become far stricter in their underwriting; thus, borrowers have much higher credit scores and borrow less of the available equity in their homes.
7 Reasons Why Consumers are Tapping into their home equity

Why Should Residential Mortgage Owners Care?

As noted by Fort Schuyler Advisors, a look at recent Google trends shows an increase in HELOCs searches with the search index at it’s highest in five years. This, coupled with a recent TD Bank survey which found 35% of millennial customers willing to consider a HELOC product, shows a clear segment of borrowers in the market that can help drive loan growth via HELOCs. Additionally, given the overall interest rate pullback, growing HELOCs origination can offset the drop in mortgage activity many originators have faced so far in 2019.
Secondary Market Considerations

1. Buying HELOCs
Since many originators have limited experience with HELOCs, but have nonetheless acknowledged the value in the product, many have shifted to buying HELOCs via loan trading. Buying via an online marketplace, such as Stackfolio, for loan trading can be a very cost-effective and time-saving solution. Stackfolio’s online loan marketplace allows the buyer to avoid the costs of origination and the potential challenges of setting up and operating the underwriting process. In addition, it can be far easier to strategically target the loan growth by specified geography, credit box, size of the loan, etc.

2. Selling HELOCs
On the other side of the spectrum, many originators of HELOCs have kept the loan origination in their portfolio but are in need of liquidity. Selling via an online marketplace for loan trading has shown to be an efficient and profitable solution. As an example, In a recent large HELOC trade on Stackfolio, the seller earned almost a 2% premium on the traded balance. This sale allowed the originator to book the non-interest income from the premium while freeing up capital and capacity for new origination and loan growth.
Sellers also have the ability to retain their servicing during a loan sale. So while sellers benefit from the added liquidity, they do not lose their valuable customer relationships during the process.
