Mortgage Pricing Insights (JUNE 2020)

Mortgage Pricing Insights

JUNE 2020

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

Mortgage Pricing Insights: June 2020

CONTENT OVERVIEW

INTRODUCTION

? MORTGAGE PRICING INSIGHTS REPORT SUMMARY ? MAY MARKET OBSERVATIONS

MORTGAGE RATES

? MORTGAGE RATE SUMMARY ? MORTGAGE RATE SPREAD TO TREASURIES ? PRIMARY TO SECONDARY YIELD SPREAD ? PRIMARY MORTGAGE RATES VIA OBMMITM ? MORTGAGE RATE FORECAST

PRIMARY MARKET

? LOAN ORIGINATION VOLUMES ? ORIGINATIONS BY PRODUCT ? BORROWER CREDIT BY PRODUCT ? LENDER PIPELINE PULL-THROUGH ? BEST-EFFORTS VS. MANDATORY SPREAD ? WHOLE LOAN VS. MBS PRICING

SECONDARY MARKET

? MBS NOMINAL SPREADS TO THE 10-YR. TREASURY ? NOMINAL SPREAD & OAS HISTORY ? MBS CC OAS TO SWAPS ? 30-YR. MBS EMPIRICAL DURATIONS ? EMPIRICAL VS. IMPLIED VOLATILITY ? CORPORATE CREDIT MARKET HIGH-YIELD SPREADS ? GSE CONFORMING MORTGAGE CREDIT CONDITIONS

SOURCES & REFERENCES

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

LEGAL DISCLAIMER

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Mortgage Pricing Insights: June 2020

INTRODUCTION

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. Federallyconnected 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.

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Mortgage Pricing Insights: June 2020

MORTGAGE RATES

MORTGAGE RATE SUMMARY

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

Source: Optimal Blue Mortgage Market IndicesTM (OBMMI TM) -- obmmi AD&Co Analytics -- ad-

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.

Rates Spread

5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

Spread

10-YR Treasury

OBMMI 30-YR Conforming Rate

3.00% 2.75% 2.50% 2.25% 2.00% 1.75% 1.50%

SPREAD TO TREASURY Open: 267 bps Close: 258 bps

Average: 262 bps Min: 255 bps Max: 271 bps

Source: Optimal Blue Mortgage Market IndicesTM (OBMMITM) -- obmmi

U.S. Department of the Treasury --

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Mortgage Pricing Insights: June 2020

MORTGAGE RATES ? Cont'd.

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 Secondary Spread

2.0 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

PRIMARY SECONDARY SPREAD

Open: 179 bps Close: 158 bps Average: 169 bps

Min: 158 bps Max: 177 bps

Source: Optimal Blue Mortgage Market IndicesTM (OBMMITM) -- obmmi Bloomberg L.P. --

PRIMARY MORTGAGE RATES VIA OBMMITM

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.

5.0%

4.5%

Mortgage Rates

MONTHLY RATE AVERAGES 4.0%

(MoM)

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

3.5%

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

3.0%

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

2.5%

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

30-YR Conforming Rate

30-YR Jumbo Rate

30-YR FHA Rate

30-YR VA Rate

Source: Optimal Blue Mortgage Market IndicesTM (OBMMI TM) -- obmmi

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