1 00:00:10,039 --> 00:00:13,520 Speaker 1: Hello, and welcome to another episode of the All Thoughts podcast. 2 00:00:13,560 --> 00:00:17,000 Speaker 1: I'm Tracy Alloway and I'm Joe Wisnal. You know, Joe, 3 00:00:17,200 --> 00:00:20,000 Speaker 1: we've been talking a lot about what higher interest rates 4 00:00:20,200 --> 00:00:22,880 Speaker 1: mean for the housing market, and we had that really 5 00:00:22,960 --> 00:00:27,159 Speaker 1: good episode with Morgan Stanley's housing strategist, Jim Egan. He 6 00:00:27,240 --> 00:00:30,840 Speaker 1: walked us through a lot of the technicalities of the 7 00:00:30,880 --> 00:00:34,880 Speaker 1: impact of higher rates on house prices. But I think 8 00:00:34,920 --> 00:00:38,320 Speaker 1: we could get even more detailed. Well, absolutely, because we 9 00:00:38,440 --> 00:00:41,879 Speaker 1: talked about what is the impact of higher rights on housing, 10 00:00:42,320 --> 00:00:44,640 Speaker 1: but we didn't really talk about why have rates gone 11 00:00:44,680 --> 00:00:47,160 Speaker 1: so much higher? And I know, like this is all 12 00:00:47,200 --> 00:00:50,080 Speaker 1: I know about housing finance. I know the government like 13 00:00:50,159 --> 00:00:53,319 Speaker 1: backstops a lot of or implicitly or explicitly actually I'm 14 00:00:53,320 --> 00:00:55,160 Speaker 1: not even sure anymore, but backstops all a lot of 15 00:00:55,200 --> 00:00:59,440 Speaker 1: it does it does even more. It's so like you 16 00:00:59,600 --> 00:01:02,200 Speaker 1: start with like the sort of risk free rate on 17 00:01:02,360 --> 00:01:05,320 Speaker 1: like treasuries because it's government, and then you add some 18 00:01:05,400 --> 00:01:08,040 Speaker 1: spread and that's like the average more and then I 19 00:01:08,080 --> 00:01:10,520 Speaker 1: don't know anything beyond that. Well, that's a fair question 20 00:01:10,520 --> 00:01:13,559 Speaker 1: that where does that spread come from? Why do people 21 00:01:13,680 --> 00:01:17,039 Speaker 1: make additional money or why do they demand an additional 22 00:01:17,080 --> 00:01:20,759 Speaker 1: premium for investing that's in something that has a guarantee 23 00:01:20,800 --> 00:01:23,480 Speaker 1: from the US government. Yeah, exactly right. This is the 24 00:01:23,520 --> 00:01:25,959 Speaker 1: part I don't understand, Like, if the if the asset 25 00:01:26,080 --> 00:01:27,800 Speaker 1: is backed by the US government, why don't we get 26 00:01:27,840 --> 00:01:30,520 Speaker 1: mortgages the same rate as treasuries? But it's not because 27 00:01:30,600 --> 00:01:33,160 Speaker 1: right now, a third year treasury somewhere on four percent 28 00:01:33,680 --> 00:01:36,959 Speaker 1: and a third year mortgage is around seven percent. And 29 00:01:37,040 --> 00:01:39,520 Speaker 1: that's spread various quite a bit from time to time. 30 00:01:39,560 --> 00:01:43,559 Speaker 1: So even as recently is last spring, the gap between 31 00:01:43,560 --> 00:01:45,560 Speaker 1: a mortgage and a treasury had gotten down to less 32 00:01:45,560 --> 00:01:48,080 Speaker 1: than one percent. Now it's around three percent. Where did 33 00:01:48,120 --> 00:01:51,120 Speaker 1: that spread come from? And why does it change over time? 34 00:01:51,240 --> 00:01:53,760 Speaker 1: Or two things? I just don't know the answers right well. Also, 35 00:01:53,840 --> 00:01:56,400 Speaker 1: that three percent spread is like at the highest that 36 00:01:56,480 --> 00:01:59,080 Speaker 1: it's been I think of all times. So like something 37 00:01:59,160 --> 00:02:00,880 Speaker 1: is happening in the mark it right now that is 38 00:02:00,960 --> 00:02:03,280 Speaker 1: different to the way it used to work, and I 39 00:02:03,280 --> 00:02:05,080 Speaker 1: think we need to dig into that. You know, we 40 00:02:05,120 --> 00:02:06,920 Speaker 1: spoke a little bit with Jim about it, but we 41 00:02:06,960 --> 00:02:10,240 Speaker 1: really need an expert. And I got to say I 42 00:02:10,280 --> 00:02:13,000 Speaker 1: was sort of bated by there was a tweet recently 43 00:02:13,600 --> 00:02:16,000 Speaker 1: It started with I'm not about to go on a 44 00:02:16,040 --> 00:02:19,720 Speaker 1: podcast to explain why, but this year has likely broken 45 00:02:19,760 --> 00:02:22,560 Speaker 1: the market for mortgage backed security. That was a dare time. 46 00:02:22,919 --> 00:02:24,240 Speaker 1: It's like if he's like you did now, just like 47 00:02:24,320 --> 00:02:25,720 Speaker 1: I'm not going to go on a podcast, It's like, 48 00:02:25,720 --> 00:02:27,640 Speaker 1: all right, let's try us, let's see, let's see if 49 00:02:27,680 --> 00:02:30,400 Speaker 1: you can resist. Okay, well, here is the podcast to 50 00:02:30,560 --> 00:02:33,960 Speaker 1: explain why the MBS market seems to be broken. We 51 00:02:34,040 --> 00:02:37,000 Speaker 1: are going to be speaking with really the perfect guest. 52 00:02:37,280 --> 00:02:41,480 Speaker 1: We have Guillermo rodit Domingo's He is the managing director 53 00:02:41,560 --> 00:02:44,040 Speaker 1: at New River Investments, and he is going to explain 54 00:02:44,080 --> 00:02:45,880 Speaker 1: all of this to us in detail. One of our 55 00:02:45,919 --> 00:02:48,320 Speaker 1: super fans, I think really, I think so. He's one 56 00:02:48,320 --> 00:02:51,000 Speaker 1: of the first to tweet them often so and we've 57 00:02:51,040 --> 00:02:53,480 Speaker 1: known him a long time. So very excited about this conversation. 58 00:02:53,480 --> 00:02:55,200 Speaker 1: So maybe it wasn't a dare, or maybe it was. 59 00:02:55,480 --> 00:02:58,360 Speaker 1: You know, please pick me for the podcast, Guermo. We 60 00:02:58,360 --> 00:03:00,799 Speaker 1: are delighted to have you on. Really looking forward to 61 00:03:00,840 --> 00:03:04,520 Speaker 1: the conversation. I am very very very happy to be honest. 62 00:03:05,120 --> 00:03:07,800 Speaker 1: A bucket list item for me, and you know I 63 00:03:07,840 --> 00:03:10,640 Speaker 1: do stay up until very late at night. So I 64 00:03:10,680 --> 00:03:13,600 Speaker 1: can listen to you know, odd Lots and tweet out 65 00:03:13,600 --> 00:03:16,079 Speaker 1: my notes before anybody else wakes up. I love that. 66 00:03:16,080 --> 00:03:18,880 Speaker 1: That makes me happy. Okay, So why don't we start 67 00:03:18,880 --> 00:03:22,560 Speaker 1: out with Here's a very simple premise, is the current 68 00:03:22,800 --> 00:03:25,720 Speaker 1: moment in the mortgage market. And you know, when I 69 00:03:25,760 --> 00:03:28,679 Speaker 1: say the mortgage market, I'm kind of talking about mortgage 70 00:03:28,720 --> 00:03:31,760 Speaker 1: back securities a k A m b S. A lot 71 00:03:31,760 --> 00:03:33,720 Speaker 1: of people will think back to you know, pre two 72 00:03:33,760 --> 00:03:36,360 Speaker 1: thousand eight times and think of them in that context. 73 00:03:37,040 --> 00:03:40,320 Speaker 1: But is this particular moment in the mortgage market different 74 00:03:40,760 --> 00:03:43,280 Speaker 1: or remarkable in some way? Like, can you give us 75 00:03:43,280 --> 00:03:47,119 Speaker 1: some historical context around what we're seeing right now? Yes, 76 00:03:47,400 --> 00:03:53,160 Speaker 1: So this moment is special because it's not happening because 77 00:03:53,200 --> 00:03:55,200 Speaker 1: people are afraid people are not going to pay their mortgages. 78 00:03:55,280 --> 00:03:57,680 Speaker 1: Is them because people are afraid house pics it's going 79 00:03:57,720 --> 00:04:02,280 Speaker 1: to go down. It's a common nation of the fact 80 00:04:02,360 --> 00:04:08,680 Speaker 1: that mortgage backed securities went from being effectively short lived 81 00:04:08,680 --> 00:04:12,720 Speaker 1: assets because we went through a pretty epic refinancing boom 82 00:04:13,000 --> 00:04:19,120 Speaker 1: in two all of a sudden, rates going up, very 83 00:04:19,200 --> 00:04:23,320 Speaker 1: very very quickly, faster than anybody expected, pre payments going 84 00:04:23,520 --> 00:04:26,520 Speaker 1: effectively to zero, and a huge train on neutral funds 85 00:04:26,800 --> 00:04:30,320 Speaker 1: from tax payments that we're do for games from counter year. 86 00:04:31,760 --> 00:04:35,040 Speaker 1: That's you know, give or take one and a quarter 87 00:04:35,520 --> 00:04:39,400 Speaker 1: trillion dollars. That's probably the highest compared to GDP that 88 00:04:39,480 --> 00:04:43,680 Speaker 1: we've ever had. This kind of conspired to leave holders 89 00:04:43,720 --> 00:04:48,440 Speaker 1: of mbs holding securities that have a much longer expected 90 00:04:48,480 --> 00:04:51,920 Speaker 1: life than than they ex than they originally expected when 91 00:04:51,920 --> 00:04:54,599 Speaker 1: they purchased them, and you know, the discount rate on 92 00:04:54,839 --> 00:04:58,440 Speaker 1: that longer life going up, which has been pretty disastrous 93 00:04:58,480 --> 00:05:02,200 Speaker 1: to the prices of this product. This gets to an 94 00:05:02,200 --> 00:05:05,919 Speaker 1: important nuance or an important thing. A person buys a 95 00:05:05,960 --> 00:05:08,880 Speaker 1: house and it takes out a thirty year fixed mortgage. 96 00:05:08,920 --> 00:05:11,599 Speaker 1: Let's start really simple. They get a thirty year fixed mortgage. 97 00:05:11,880 --> 00:05:15,680 Speaker 1: Someone owns that asset, but their expectation is not that 98 00:05:15,720 --> 00:05:19,000 Speaker 1: they're going to hold that for thirty years. They're not 99 00:05:19,080 --> 00:05:22,080 Speaker 1: thinking like, Okay, I'm gonna wait thirty years. What is 100 00:05:22,400 --> 00:05:27,680 Speaker 1: the typical length via which that asset exists? How frequently 101 00:05:27,800 --> 00:05:31,200 Speaker 1: in normal times would it either get refinanced by the 102 00:05:31,240 --> 00:05:34,640 Speaker 1: homeowner or sold because the homeowner sells the house and 103 00:05:34,760 --> 00:05:38,560 Speaker 1: the loan gets paid back automatically. On a basic on scenario, 104 00:05:39,040 --> 00:05:41,479 Speaker 1: you would assume that you have a thirty year mortgage 105 00:05:41,600 --> 00:05:44,400 Speaker 1: transit weighted average life of the castles, because it's an 106 00:05:44,400 --> 00:05:48,760 Speaker 1: advertising a loan of about you know, fifteen years, and 107 00:05:49,040 --> 00:05:52,279 Speaker 1: we have some expectation of turnover. You know, people move, 108 00:05:52,680 --> 00:05:55,800 Speaker 1: you know, people sell, sell their houses, or prepay their 109 00:05:55,800 --> 00:05:58,880 Speaker 1: loans for many different reasons, all sorts of life events, 110 00:05:59,720 --> 00:06:03,200 Speaker 1: and you know that shortens the effective life to you know, 111 00:06:03,279 --> 00:06:05,240 Speaker 1: about half of that about seven years. And usually we're 112 00:06:05,240 --> 00:06:08,560 Speaker 1: assuming anywhere between six and eight percent of loans on 113 00:06:08,600 --> 00:06:12,760 Speaker 1: an annual basis transition, not because they are refinanced to 114 00:06:13,200 --> 00:06:16,919 Speaker 1: their being a rave incentive, but from any other number 115 00:06:16,920 --> 00:06:22,360 Speaker 1: of reasons. During one we saw about thirty six percent 116 00:06:22,880 --> 00:06:26,719 Speaker 1: of loan balances being extinguished each year. That's a lot, 117 00:06:26,920 --> 00:06:29,279 Speaker 1: you know, Usually, you know we're expecting about half of 118 00:06:29,320 --> 00:06:33,640 Speaker 1: that sixteen. You'll recall in the first three course of 119 00:06:33,640 --> 00:06:35,760 Speaker 1: the year we had pretty low rates and we got 120 00:06:35,800 --> 00:06:37,839 Speaker 1: up to twenty and that was that was pretty high. 121 00:06:38,240 --> 00:06:40,520 Speaker 1: And you know t n which was a more normal year, 122 00:06:40,600 --> 00:06:43,279 Speaker 1: we were at out seventeen. So you know, this fueled 123 00:06:43,440 --> 00:06:46,440 Speaker 1: a lot of extinguished singing over those balances, and you know, 124 00:06:46,520 --> 00:06:51,040 Speaker 1: you you bought what you thought was a seven year asset, 125 00:06:51,360 --> 00:06:53,400 Speaker 1: and you know, it turned out that it was, you know, 126 00:06:53,920 --> 00:06:57,960 Speaker 1: a five year asset, and then happens and all of 127 00:06:58,000 --> 00:07:00,440 Speaker 1: a sudden, you know, you're holding a ten year asset, right, 128 00:07:00,560 --> 00:07:02,480 Speaker 1: So can we dig into this just a little bit 129 00:07:02,480 --> 00:07:05,440 Speaker 1: more because I seem to remember during the era of 130 00:07:05,560 --> 00:07:09,080 Speaker 1: low interest rates, so you know, after two thousand and eight, 131 00:07:09,200 --> 00:07:12,120 Speaker 1: when rates were just grinding lower and lower and lower, 132 00:07:12,560 --> 00:07:16,000 Speaker 1: the big investors in MBS, the big buyers, and we 133 00:07:16,000 --> 00:07:18,640 Speaker 1: should probably talk about who those actually are. At some point, 134 00:07:18,920 --> 00:07:22,760 Speaker 1: they didn't want MBS to be prepaid because it basically 135 00:07:22,840 --> 00:07:24,840 Speaker 1: meant that they would get like a bunch of money 136 00:07:24,880 --> 00:07:28,040 Speaker 1: that they then had to invest at even lower interest rates. 137 00:07:28,680 --> 00:07:32,200 Speaker 1: Now we're in an environment of higher rates, and it 138 00:07:32,280 --> 00:07:36,720 Speaker 1: feels like MBS is not desirable because suddenly it leaves 139 00:07:36,760 --> 00:07:40,160 Speaker 1: you with an asset that has much longer duration than 140 00:07:40,200 --> 00:07:44,280 Speaker 1: you expected and much more exposure to interest rate volatility. 141 00:07:44,400 --> 00:07:48,480 Speaker 1: Is that right? Yeah, that's correct. I think one way 142 00:07:48,640 --> 00:07:52,680 Speaker 1: to look at it is a mortgage backed security is 143 00:07:53,240 --> 00:07:57,040 Speaker 1: essentially similar to a covered call in equity terms. That 144 00:07:57,080 --> 00:07:58,880 Speaker 1: means that you know you have all of the downside 145 00:07:59,080 --> 00:08:01,520 Speaker 1: and you know very very little of the upside and 146 00:08:01,520 --> 00:08:03,560 Speaker 1: you trade that in for a little bit of extra coupon. 147 00:08:03,880 --> 00:08:07,280 Speaker 1: And you know, when rates were going down, everybody was 148 00:08:07,320 --> 00:08:10,040 Speaker 1: upset about it because you know, treasury bonds were going 149 00:08:10,080 --> 00:08:11,640 Speaker 1: up and frist people are making money there. If you 150 00:08:11,760 --> 00:08:13,880 Speaker 1: have the NBS, you know you've got your money back, 151 00:08:13,880 --> 00:08:15,920 Speaker 1: and then you want to buy new bonds. You know 152 00:08:16,000 --> 00:08:18,320 Speaker 1: you bought them at a lower yield. And right now 153 00:08:18,360 --> 00:08:22,000 Speaker 1: what we're seeing is all of a sudden, bond prices 154 00:08:22,040 --> 00:08:24,720 Speaker 1: are are going down, the yields are going up, and 155 00:08:25,040 --> 00:08:27,120 Speaker 1: you know you're not getting any castles, so you don't 156 00:08:27,120 --> 00:08:29,360 Speaker 1: get to reinvest the money. This is sort of a 157 00:08:29,480 --> 00:08:31,560 Speaker 1: key thing, and I just want to like make it clear. 158 00:08:31,600 --> 00:08:35,680 Speaker 1: You know, everybody knows that a homeowner can always like 159 00:08:35,720 --> 00:08:38,360 Speaker 1: refinance their home, and people talk about like homeowners a 160 00:08:38,480 --> 00:08:40,880 Speaker 1: third year fixed has like a quote like free option 161 00:08:41,400 --> 00:08:44,400 Speaker 1: to refinance their home if rates go down after them. 162 00:08:44,480 --> 00:08:48,040 Speaker 1: But essentially that free option for the homeowner is a 163 00:08:48,080 --> 00:08:52,760 Speaker 1: theoretical source of risk for the holder of the NBS. 164 00:08:52,800 --> 00:08:55,640 Speaker 1: So there's two ways for the MBS holder to lose. It. 165 00:08:55,679 --> 00:08:58,320 Speaker 1: Sounds like one is, Okay, rates go up a lot 166 00:08:58,400 --> 00:09:01,160 Speaker 1: and then you're not getting much payment done those bonds 167 00:09:01,360 --> 00:09:04,240 Speaker 1: or ready to go down and then you have to like, 168 00:09:04,400 --> 00:09:07,360 Speaker 1: you know, eat that repayment. Yeah, and I mean I 169 00:09:07,360 --> 00:09:12,000 Speaker 1: would say that it's not a pre option. It's an 170 00:09:12,000 --> 00:09:15,720 Speaker 1: expensive option. Not always, but right now it is. We're 171 00:09:15,760 --> 00:09:20,760 Speaker 1: talking about why our mortgages at you know, seven plus 172 00:09:21,200 --> 00:09:25,600 Speaker 1: when you know treasuries are at four. You know, just 173 00:09:26,160 --> 00:09:30,240 Speaker 1: a year ago, treasuries were two and fifty basis points lower, 174 00:09:31,120 --> 00:09:35,400 Speaker 1: but mortgages were basis points lower. Maybe this is a 175 00:09:35,400 --> 00:09:37,760 Speaker 1: good moment to sort of step back and talk about 176 00:09:37,800 --> 00:09:41,559 Speaker 1: who the big buyers of mortgage backed securities actually are. 177 00:09:41,640 --> 00:09:45,040 Speaker 1: And one thing I would be curious to hear is 178 00:09:45,160 --> 00:09:48,840 Speaker 1: have they changed from pre two th eight to now? 179 00:09:48,960 --> 00:09:52,000 Speaker 1: Because of course, I mean the big change has been 180 00:09:52,120 --> 00:09:55,560 Speaker 1: the Federal Reserve when it started quantitative easing. You know, 181 00:09:56,040 --> 00:09:58,480 Speaker 1: it bought a whole bunch of different types of bonds, 182 00:09:58,520 --> 00:10:01,160 Speaker 1: but one of those was NBA. Now that they're in 183 00:10:01,400 --> 00:10:04,560 Speaker 1: quantitative tightening mode, they've sort of stepped back from the market. 184 00:10:04,640 --> 00:10:06,440 Speaker 1: So could you maybe talk a little bit about the 185 00:10:06,480 --> 00:10:10,480 Speaker 1: ecosystem of who actually purchases these securities and the kind 186 00:10:10,480 --> 00:10:13,920 Speaker 1: of considerations that they're thinking about as they decide whether 187 00:10:14,000 --> 00:10:18,120 Speaker 1: or not to buy more or less MBS. The answer 188 00:10:18,120 --> 00:10:19,600 Speaker 1: that nobody wants to tell you is that right now 189 00:10:19,600 --> 00:10:23,320 Speaker 1: there's no natural buyers right you know, and that's that's 190 00:10:23,320 --> 00:10:25,640 Speaker 1: the problem. You see these spreads go really wide. The 191 00:10:25,679 --> 00:10:28,040 Speaker 1: problem is that who is the buyer right now? Right now, 192 00:10:28,080 --> 00:10:31,640 Speaker 1: there is no natural buyers. Postal thousand and eight, you 193 00:10:31,760 --> 00:10:35,800 Speaker 1: had you know, banks that had expanding deposits and you know, 194 00:10:35,840 --> 00:10:39,080 Speaker 1: there was not to no loan growth, and so banks 195 00:10:39,120 --> 00:10:44,680 Speaker 1: kind of building that gap with MS. Bonds funds had 196 00:10:44,880 --> 00:10:47,920 Speaker 1: you know, pretty sizable inflows. And when you think about 197 00:10:47,920 --> 00:10:50,360 Speaker 1: bond funds, you know you're thinking about like people goes 198 00:10:50,400 --> 00:10:54,040 Speaker 1: total return fund or you know double lens total return fund. 199 00:10:54,480 --> 00:10:58,240 Speaker 1: These are these are funds that engage in you know, 200 00:10:58,840 --> 00:11:01,880 Speaker 1: marginal risk ging in a liquid securities in order to 201 00:11:01,920 --> 00:11:04,800 Speaker 1: boost the yield of their fund. And you know, as 202 00:11:04,800 --> 00:11:08,200 Speaker 1: long as you keep that a liquid portion to a 203 00:11:08,240 --> 00:11:12,199 Speaker 1: small percentage of the fundacets, you know, you can enhance 204 00:11:12,240 --> 00:11:16,240 Speaker 1: the yield for for the whole fund. Ever since the 205 00:11:16,280 --> 00:11:18,480 Speaker 1: start of the year, you know, bond funds have been 206 00:11:18,640 --> 00:11:21,760 Speaker 1: seeing weekly outflows, so there are certainly not buyers there. 207 00:11:21,880 --> 00:11:24,760 Speaker 1: You know, the Federal Reserve is not a buyer. Banks 208 00:11:25,000 --> 00:11:28,280 Speaker 1: have demand for loans and managers at banks. You know, 209 00:11:28,280 --> 00:11:30,839 Speaker 1: I thought that they were ready for the risk that 210 00:11:31,000 --> 00:11:34,160 Speaker 1: extension of MBS would entail, and it terms out that 211 00:11:34,240 --> 00:11:37,360 Speaker 1: you know, maybe they don't like it so much, so 212 00:11:37,760 --> 00:11:39,640 Speaker 1: they're not buyers of the product. We used to have 213 00:11:39,720 --> 00:11:43,240 Speaker 1: a pretty healthy demand for some of the cash flows, 214 00:11:43,280 --> 00:11:46,040 Speaker 1: particularly the more longer dated cash flows. There you would 215 00:11:46,080 --> 00:11:49,520 Speaker 1: get into you know, transition, but you'd have some demand 216 00:11:49,559 --> 00:11:54,080 Speaker 1: for that stuff from buyers in Asia, and they're in 217 00:11:54,080 --> 00:11:57,960 Speaker 1: over to be seen. And because of this prepayment risk, 218 00:11:58,280 --> 00:12:01,600 Speaker 1: it's a very poorfeit for people that are in the 219 00:12:01,640 --> 00:12:04,920 Speaker 1: business of matching assets and liabilities because you know, if 220 00:12:04,960 --> 00:12:07,040 Speaker 1: you're in the business and matching assets and liabilities, you 221 00:12:07,040 --> 00:12:09,479 Speaker 1: don't want your asset to get called because the liability 222 00:12:09,520 --> 00:12:12,040 Speaker 1: is not getting called. So you know, it's a nonstarter 223 00:12:12,200 --> 00:12:15,559 Speaker 1: for them, very very few people who want to start. 224 00:12:32,080 --> 00:12:35,120 Speaker 1: Can we just go back on prepayment risk specifically, And 225 00:12:35,160 --> 00:12:37,839 Speaker 1: you made a good point that this option that homeowners 226 00:12:37,880 --> 00:12:40,440 Speaker 1: have to refinance, it's not a free option. They pay 227 00:12:40,520 --> 00:12:42,840 Speaker 1: for it and the spread and that's spread is wide, 228 00:12:42,880 --> 00:12:46,160 Speaker 1: so just you know, seven percent mortgages four percent treasuries, 229 00:12:46,200 --> 00:12:49,440 Speaker 1: you're actually paying a significant amount to borrow that money 230 00:12:49,600 --> 00:12:52,520 Speaker 1: is part of what investors are concerned about, or is 231 00:12:52,559 --> 00:12:56,040 Speaker 1: part of why that option is so expensive right now, 232 00:12:56,360 --> 00:12:59,480 Speaker 1: simply because there is concerned that like, Okay, there's the 233 00:12:59,559 --> 00:13:03,400 Speaker 1: spike rates due to the fight inflation, that's kind of temporary, 234 00:13:03,440 --> 00:13:06,560 Speaker 1: and that rates might you know, reset lower significantly in 235 00:13:06,600 --> 00:13:08,720 Speaker 1: a couple of years, and that we get this huge 236 00:13:08,760 --> 00:13:12,319 Speaker 1: wave of like everyone who can refinances then. So it's 237 00:13:12,320 --> 00:13:14,360 Speaker 1: like if you're you know, if I'm buying a home 238 00:13:14,440 --> 00:13:17,640 Speaker 1: right now, I'm probably thinking, well, I really get I 239 00:13:17,679 --> 00:13:20,000 Speaker 1: really hope this's like inflation fight ends in a couple 240 00:13:20,000 --> 00:13:23,600 Speaker 1: of years and that I can like refinance or something. 241 00:13:23,760 --> 00:13:27,080 Speaker 1: That's exactly right. Nobody wants to take their money at 242 00:13:27,120 --> 00:13:29,840 Speaker 1: this point. You know, if you've had cash up until now, 243 00:13:30,760 --> 00:13:33,679 Speaker 1: you know you've done very well versus the losses that 244 00:13:33,760 --> 00:13:36,440 Speaker 1: you know, everything else has taken. So if you're going 245 00:13:36,480 --> 00:13:39,680 Speaker 1: to put money to work now, why are you going 246 00:13:39,720 --> 00:13:42,440 Speaker 1: to put it into an asset that you know that 247 00:13:43,000 --> 00:13:46,160 Speaker 1: may have capped upside? For most people, it's it either 248 00:13:46,240 --> 00:13:48,880 Speaker 1: doesn't make sense or it's just not something that they're 249 00:13:48,920 --> 00:13:51,480 Speaker 1: willing to consider. You know, if rates go down and 250 00:13:51,720 --> 00:13:55,040 Speaker 1: you buy treasuries, you're gonna make up boatload of money. 251 00:13:55,679 --> 00:13:58,120 Speaker 1: If rates go down and you buy MBS, you might 252 00:13:58,120 --> 00:14:01,319 Speaker 1: not make any money. Can you talk about like whether 253 00:14:01,480 --> 00:14:05,600 Speaker 1: or not there are forced buyers or buyers who have 254 00:14:05,840 --> 00:14:09,440 Speaker 1: to buy MBS. And I'm thinking specifically of, you know, 255 00:14:09,520 --> 00:14:13,040 Speaker 1: situations where you might have a bond fund that's benchmarked 256 00:14:13,160 --> 00:14:16,360 Speaker 1: to a benchmark index, something like the Bloomberg Barkley's AGG 257 00:14:16,520 --> 00:14:19,920 Speaker 1: or something like that. And I seem to recall there 258 00:14:20,000 --> 00:14:23,560 Speaker 1: was some discussion again in the mid two thousands that 259 00:14:23,720 --> 00:14:27,080 Speaker 1: it was unfair that the Barkley's index still included a 260 00:14:27,120 --> 00:14:31,120 Speaker 1: bunch of MBS when there wasn't actually that much MBS 261 00:14:31,160 --> 00:14:33,880 Speaker 1: in the market because the FED was buying it, and 262 00:14:34,040 --> 00:14:36,240 Speaker 1: MBS was a source of duration for a lot of 263 00:14:36,240 --> 00:14:39,200 Speaker 1: the funds, and if they couldn't, you know, buy MBS, 264 00:14:39,280 --> 00:14:41,400 Speaker 1: and they couldn't be as exposed to duration as the 265 00:14:41,440 --> 00:14:44,560 Speaker 1: benchmark index. And so you had people like Pimco actually 266 00:14:44,600 --> 00:14:47,920 Speaker 1: complaining that there wasn't enough MBS in the market. So 267 00:14:48,000 --> 00:14:50,560 Speaker 1: it's kind of ironic that fast forward, you know, seven 268 00:14:50,640 --> 00:14:53,680 Speaker 1: years or something, and a lot of these big buyers 269 00:14:54,040 --> 00:14:57,040 Speaker 1: don't want to touch MBS with a ten foot poll 270 00:14:57,160 --> 00:15:00,640 Speaker 1: after complaining that, you know, they couldn't get enough of it. 271 00:15:01,000 --> 00:15:04,360 Speaker 1: Anybody that tracks an index is not gonna be necessarily 272 00:15:04,520 --> 00:15:07,080 Speaker 1: a forced fire because the funds that track an index 273 00:15:07,440 --> 00:15:11,920 Speaker 1: don't necessarily replicate it down to every single line item. 274 00:15:11,960 --> 00:15:14,720 Speaker 1: That's you know, incredibly difficult to do. In fix sincom, 275 00:15:14,760 --> 00:15:17,640 Speaker 1: where you know, you're talking about tens of thousands or 276 00:15:17,720 --> 00:15:20,840 Speaker 1: hundreds of thousands of different bonds, and especially in NBS 277 00:15:20,880 --> 00:15:25,360 Speaker 1: where you don't have a fungible product, you know, there's 278 00:15:25,760 --> 00:15:28,360 Speaker 1: you know, thousands of thousands of pools that are packaged 279 00:15:28,400 --> 00:15:31,840 Speaker 1: in different ways, and dealers will often sell you know, 280 00:15:32,280 --> 00:15:35,120 Speaker 1: the entirety of an issuance to a single buyer, and 281 00:15:35,160 --> 00:15:38,360 Speaker 1: so there's no chance for anybody to really replicate It's 282 00:15:38,400 --> 00:15:41,760 Speaker 1: it's impossible to replicate an index, and so you know, 283 00:15:41,840 --> 00:15:45,880 Speaker 1: you have some leeway around that. And sure there's you know, 284 00:15:46,000 --> 00:15:48,320 Speaker 1: there's flows going into index trackers that are going to 285 00:15:48,440 --> 00:15:51,280 Speaker 1: replicate that, but there's also a lot of funds leaving, 286 00:15:51,680 --> 00:15:55,480 Speaker 1: you know, a lot of flows out of different products 287 00:15:55,520 --> 00:16:01,160 Speaker 1: that are more heavily exposed two mbs and I wouldn't 288 00:16:01,200 --> 00:16:04,400 Speaker 1: be thinking about four spires. I'm thinking about four sellers. Sorry, 289 00:16:04,400 --> 00:16:06,720 Speaker 1: Can you expand on that point a little bit more 290 00:16:06,760 --> 00:16:09,840 Speaker 1: like what would trigger a for sale of MBS. Let's 291 00:16:09,840 --> 00:16:13,960 Speaker 1: say you know you have uh total return fund at 292 00:16:14,200 --> 00:16:17,640 Speaker 1: at a large manager, you know, well known large manager, 293 00:16:17,680 --> 00:16:20,560 Speaker 1: and you're participating in the MBS market. Is that way 294 00:16:20,560 --> 00:16:23,160 Speaker 1: you can get some extra spread for your clients and 295 00:16:23,200 --> 00:16:24,760 Speaker 1: you can get them, you know, a little bit of 296 00:16:24,760 --> 00:16:28,360 Speaker 1: a higher return. And all of a sudden, starting this year, 297 00:16:28,400 --> 00:16:31,840 Speaker 1: you start getting massive outflows. And maybe you keep I 298 00:16:31,840 --> 00:16:34,840 Speaker 1: don't know, five or ten percent of your assets in 299 00:16:35,000 --> 00:16:37,800 Speaker 1: super liquid securities and that's going to be bills and 300 00:16:37,800 --> 00:16:40,680 Speaker 1: and one your treasuries or you know, to year notes, 301 00:16:41,680 --> 00:16:45,080 Speaker 1: and all of a sudden, outflows keep coming. You run 302 00:16:45,080 --> 00:16:47,880 Speaker 1: through your bills, you run through your one year notes, 303 00:16:48,320 --> 00:16:50,920 Speaker 1: you know, you run through your two year notes, and 304 00:16:50,960 --> 00:16:55,040 Speaker 1: all of a sudden, you know, you're pre payments, which 305 00:16:55,080 --> 00:16:57,560 Speaker 1: you know, we're coming in every month, and you were 306 00:16:58,080 --> 00:17:00,640 Speaker 1: cash flowing a lot from from those pre payment some nbs, 307 00:17:00,680 --> 00:17:03,760 Speaker 1: all of a sudden they totally stopped. So you you 308 00:17:03,840 --> 00:17:07,119 Speaker 1: have outflows, you have no cash flow coming in, Well, 309 00:17:07,200 --> 00:17:09,840 Speaker 1: you're gonna have to sell something. And you know, unfortunately 310 00:17:09,960 --> 00:17:13,480 Speaker 1: for for many managers, we've been seeing since about March, 311 00:17:13,920 --> 00:17:17,320 Speaker 1: you know, kind of a relentless number of We call 312 00:17:17,400 --> 00:17:20,320 Speaker 1: them be wicks since for bids wanted in competition, it's 313 00:17:20,400 --> 00:17:23,919 Speaker 1: essentially when you option off your bonds to the highest bidder. 314 00:17:24,080 --> 00:17:25,600 Speaker 1: And you know, we've seen that a lot of these 315 00:17:25,600 --> 00:17:31,440 Speaker 1: options bring few or no participants. We have this period 316 00:17:31,440 --> 00:17:33,879 Speaker 1: of high inflation, so of course there's a lot of 317 00:17:33,880 --> 00:17:36,360 Speaker 1: second guessing about all kinds of policies that we're going 318 00:17:36,359 --> 00:17:42,280 Speaker 1: on in one etcetera, fiscal, monetary, etcetera. And one of 319 00:17:42,320 --> 00:17:45,399 Speaker 1: the criticisms of like why was the FED still buying 320 00:17:45,720 --> 00:17:49,360 Speaker 1: you know, mortgage backed securities up until you know, relatively 321 00:17:49,560 --> 00:17:53,960 Speaker 1: recently in your view, can we quantify the degree to 322 00:17:54,119 --> 00:17:57,840 Speaker 1: which that FED buying depressed spreads? Or to put it 323 00:17:57,840 --> 00:17:59,679 Speaker 1: in another way, like, okay, we have this, you know, 324 00:17:59,720 --> 00:18:04,080 Speaker 1: this represent spread between mortgages and treasuries. Can we, like 325 00:18:04,160 --> 00:18:06,840 Speaker 1: I can we decompose, like how much of that can 326 00:18:06,920 --> 00:18:10,320 Speaker 1: just be explained via the FEDS switching from being a 327 00:18:10,320 --> 00:18:12,760 Speaker 1: buyer to a seller of these assets. I can give 328 00:18:12,800 --> 00:18:15,439 Speaker 1: you my best estimate, and so that would be for 329 00:18:16,119 --> 00:18:19,120 Speaker 1: when you're talking about calendar year, I would say about 330 00:18:19,760 --> 00:18:25,600 Speaker 1: to thirty basis points was from you know, QUI continuing 331 00:18:25,680 --> 00:18:29,399 Speaker 1: maybe later than we needed to, we don't have a 332 00:18:29,440 --> 00:18:33,560 Speaker 1: counterfactual of no que to look at. And if we 333 00:18:33,640 --> 00:18:36,400 Speaker 1: look at before their great financial crisis for that kind 334 00:18:36,400 --> 00:18:39,640 Speaker 1: of counter factual, well, the market was a lot, there 335 00:18:39,680 --> 00:18:45,200 Speaker 1: was a lot more private label and bs, the implicit 336 00:18:45,240 --> 00:18:48,800 Speaker 1: guarantees were maybe a little bit less implicit, and there 337 00:18:48,960 --> 00:18:52,320 Speaker 1: was less market share dominated by Jinny May, which is 338 00:18:52,320 --> 00:18:55,400 Speaker 1: obviously an explicit guarantee. But I would say that if 339 00:18:55,400 --> 00:18:58,399 Speaker 1: you wanted to compare to you know, the FED not 340 00:18:58,480 --> 00:19:01,840 Speaker 1: intervening at all, I think fifty basis points is not 341 00:19:02,640 --> 00:19:05,880 Speaker 1: a bad guess, but you know, versus scenario, I would 342 00:19:05,880 --> 00:19:08,439 Speaker 1: say about twenty five basis points. That's that's how much 343 00:19:08,720 --> 00:19:11,719 Speaker 1: the depressive spread. Can you talk a little bit more 344 00:19:11,960 --> 00:19:15,560 Speaker 1: about what's going on with the banks? So they're a 345 00:19:15,600 --> 00:19:19,320 Speaker 1: big buyer of mbs, as you mentioned, and I've seen 346 00:19:19,440 --> 00:19:22,199 Speaker 1: some discussion, you know, for instance, JP Morgan had a 347 00:19:22,240 --> 00:19:25,120 Speaker 1: note a couple of weeks ago talking about how leverage 348 00:19:25,520 --> 00:19:30,200 Speaker 1: and risk capital requirements for the big banks basically makes 349 00:19:30,200 --> 00:19:34,400 Speaker 1: it much more difficult for them to hold onto these assets, 350 00:19:34,400 --> 00:19:36,720 Speaker 1: to hold onto mbs, and so they haven't been buying 351 00:19:36,720 --> 00:19:39,080 Speaker 1: as much of them, and that's one reason why that's 352 00:19:39,080 --> 00:19:42,880 Speaker 1: spread between benchmark rates i e. Treasuries and mortgage rates 353 00:19:42,920 --> 00:19:46,120 Speaker 1: has been going up. Is that a valid analysis or 354 00:19:46,280 --> 00:19:50,040 Speaker 1: is this another excuse for big banks to complain about 355 00:19:50,119 --> 00:19:54,720 Speaker 1: various regulatory requirements. I think it's a valid criticism. I 356 00:19:54,720 --> 00:19:57,520 Speaker 1: think it was just last week or pride of that 357 00:19:57,600 --> 00:19:59,640 Speaker 1: to them and said that, you know, they don't want 358 00:19:59,640 --> 00:20:04,240 Speaker 1: any aret of the conforming mortgage space, but they're not 359 00:20:04,680 --> 00:20:08,960 Speaker 1: participating that at all. Currently. The capital requirements they don't 360 00:20:09,000 --> 00:20:12,119 Speaker 1: make it prohibitive for banks to participate. It just means 361 00:20:12,160 --> 00:20:16,840 Speaker 1: that if they have demand for loans, well that's more 362 00:20:16,880 --> 00:20:19,840 Speaker 1: attractive to them, and so they're not going to participate 363 00:20:19,880 --> 00:20:23,560 Speaker 1: in something that is like relatively less attractive. You know, 364 00:20:23,600 --> 00:20:27,240 Speaker 1: if they can originate a lot of personal loans were 365 00:20:27,320 --> 00:20:32,680 Speaker 1: not conforming loans or credit to their their corporate borrowers, 366 00:20:32,920 --> 00:20:36,320 Speaker 1: they're probably going to focus on those activities instead of 367 00:20:36,560 --> 00:20:39,919 Speaker 1: you know, buying mbs. The other part of it is 368 00:20:39,960 --> 00:20:46,760 Speaker 1: that everybody kind of assumed a certain base level of 369 00:20:46,800 --> 00:20:54,159 Speaker 1: prepayments that in retrospect was not sustainable. I don't want 370 00:20:54,160 --> 00:20:56,960 Speaker 1: to say sustainable, but you know, everybody kind of assumed 371 00:20:56,960 --> 00:20:59,359 Speaker 1: that there will be a flour like that even if 372 00:20:59,480 --> 00:21:03,680 Speaker 1: rates went out pre payments wouldn't decline past a certain point, 373 00:21:03,760 --> 00:21:07,080 Speaker 1: and they did, and maybe you bought a bond and 374 00:21:07,080 --> 00:21:09,240 Speaker 1: you thought, well, worst case scenario, rates go up, and 375 00:21:09,240 --> 00:21:11,440 Speaker 1: then you know the duration of it. You know, it 376 00:21:11,480 --> 00:21:14,760 Speaker 1: goes from from three years to five years, and you know, 377 00:21:14,800 --> 00:21:16,760 Speaker 1: it turns out that now you're looking at six and 378 00:21:16,880 --> 00:21:18,800 Speaker 1: you know, you thought you would be comfortable with five, 379 00:21:18,920 --> 00:21:20,640 Speaker 1: but it turns out that you don't feel so comfortable 380 00:21:20,680 --> 00:21:22,920 Speaker 1: with five, and now you have six on top of it, 381 00:21:23,520 --> 00:21:27,439 Speaker 1: you know, And so there's just a general lack of 382 00:21:27,680 --> 00:21:31,080 Speaker 1: appetite for this. And you see this a lot. I mean, 383 00:21:31,560 --> 00:21:33,760 Speaker 1: you know managers and banks that are just you know, 384 00:21:33,960 --> 00:21:37,520 Speaker 1: normal people, and they have the same biases and reactions 385 00:21:37,520 --> 00:21:39,000 Speaker 1: as all of us. And you know, you get you 386 00:21:39,040 --> 00:21:40,800 Speaker 1: get burned by something you don't want to do it again, 387 00:21:41,240 --> 00:21:44,119 Speaker 1: and they just got burned by the extension risk of them. Yes, 388 00:21:44,520 --> 00:21:48,480 Speaker 1: in the intro, since you mentioned the difference between conforming 389 00:21:48,560 --> 00:21:51,520 Speaker 1: and nonconforming loans, and in the intro, I was like, wait, 390 00:21:51,560 --> 00:21:54,040 Speaker 1: you like Fanny and Freddie still exist because I kind 391 00:21:54,040 --> 00:21:56,159 Speaker 1: of forgot about them and tratically like give me like 392 00:21:56,160 --> 00:21:58,879 Speaker 1: a really like me and look like what it is? 393 00:21:58,920 --> 00:22:00,879 Speaker 1: What I mean, I just roll my eyes. She was 394 00:22:01,760 --> 00:22:04,160 Speaker 1: she was surprised that her co host could say something 395 00:22:04,200 --> 00:22:06,160 Speaker 1: so stupid, like do Fanny and Freddy? But I actually 396 00:22:06,200 --> 00:22:07,840 Speaker 1: don't know what's going on with them because I just 397 00:22:08,119 --> 00:22:10,159 Speaker 1: they're like penny stocks now and I don't really know 398 00:22:10,200 --> 00:22:12,800 Speaker 1: what happened. So could you talk a little bit about 399 00:22:12,840 --> 00:22:15,720 Speaker 1: like what they do now? Like what is their role? 400 00:22:15,840 --> 00:22:18,920 Speaker 1: How big is the difference between the conforming versus nonconforming? 401 00:22:19,000 --> 00:22:22,680 Speaker 1: Like where do things stand with the g c s. Well, 402 00:22:22,720 --> 00:22:25,440 Speaker 1: they're a huge part of the market. I can't tell 403 00:22:25,440 --> 00:22:28,199 Speaker 1: you the exact percentage right now. I actually don't have 404 00:22:28,200 --> 00:22:30,879 Speaker 1: the number in front of me. Jenny May has been 405 00:22:31,280 --> 00:22:34,200 Speaker 1: growing their share over the last decade, but you know, 406 00:22:34,280 --> 00:22:37,959 Speaker 1: Fannie and Freddy are still huge players. And you know 407 00:22:38,240 --> 00:22:44,280 Speaker 1: their role is that DIVII loans from from originators and 408 00:22:44,320 --> 00:22:47,240 Speaker 1: then they know they package someone to two MBS and 409 00:22:47,400 --> 00:22:48,960 Speaker 1: saw them at the market, and they're not in the 410 00:22:48,960 --> 00:22:52,000 Speaker 1: business of, you know, speculating on racist spread. You know, 411 00:22:52,200 --> 00:22:59,280 Speaker 1: they basically just facilitate moving those loans from loan originators 412 00:22:59,480 --> 00:23:02,760 Speaker 1: to the the private buyers in the in the market, 413 00:23:03,280 --> 00:23:06,159 Speaker 1: and as part of that, they guarantee the credit of 414 00:23:06,240 --> 00:23:12,760 Speaker 1: the loans and that's about fifty five basis points effectively. 415 00:23:13,960 --> 00:23:18,400 Speaker 1: There's you know, there's gonna be some variation there because 416 00:23:19,480 --> 00:23:22,800 Speaker 1: you know, some borrowers or more credit worthy than other borrowers, 417 00:23:22,880 --> 00:23:28,200 Speaker 1: and and certain types of loans are penalized. But I've 418 00:23:28,280 --> 00:23:31,720 Speaker 1: ruled that. I think that people don't really consider is 419 00:23:31,760 --> 00:23:34,640 Speaker 1: that you know, they do have certain policies. They act 420 00:23:35,880 --> 00:23:39,000 Speaker 1: to an excellent sort of policy, right, you know, earlier 421 00:23:39,080 --> 00:23:42,080 Speaker 1: this year, at the end of January, I believe NIM 422 00:23:42,240 --> 00:23:47,480 Speaker 1: came out and said, hey, we're gonna restrict credit and 423 00:23:47,760 --> 00:23:51,720 Speaker 1: increase the price of credit for borrowers that are borrowing 424 00:23:52,200 --> 00:23:59,679 Speaker 1: for an investment property or a vacation home. And especially 425 00:23:59,720 --> 00:24:02,200 Speaker 1: if you know, if that vacation if you're trying to 426 00:24:02,280 --> 00:24:05,800 Speaker 1: refinance that vacation home, and especially so if you're trying 427 00:24:05,840 --> 00:24:09,400 Speaker 1: to take cash out you know, on on every finance, 428 00:24:09,800 --> 00:24:14,439 Speaker 1: and especially so if the loan to value ratio is high. 429 00:24:14,600 --> 00:24:19,000 Speaker 1: They kind of saw that there was a little bit 430 00:24:19,000 --> 00:24:21,720 Speaker 1: of frath going on, you know, with with people trying 431 00:24:21,720 --> 00:24:25,679 Speaker 1: to build you know, many real estate empires and you know, 432 00:24:26,720 --> 00:24:30,520 Speaker 1: buy a bunch of properties to airbnb them, and and 433 00:24:30,560 --> 00:24:32,679 Speaker 1: they said, hey, no, no, no, this is this is 434 00:24:32,720 --> 00:24:36,040 Speaker 1: not what these institutions are for. We don't want to 435 00:24:36,119 --> 00:24:39,320 Speaker 1: encourage this. So we're gonna we're gonna actually restrict how 436 00:24:39,400 --> 00:24:41,320 Speaker 1: much money you know, we're gonna give you. We're gonna 437 00:24:41,359 --> 00:24:44,199 Speaker 1: make that money more expensive. But they can't, you know, 438 00:24:44,320 --> 00:24:46,320 Speaker 1: just change the price from like one day to another. 439 00:24:46,560 --> 00:24:48,679 Speaker 1: They have to give you a certain amount of notice. 440 00:24:48,720 --> 00:24:51,640 Speaker 1: And there's customs in this market. And so they said, 441 00:24:51,680 --> 00:24:56,159 Speaker 1: you know, any loan that is, you know, delivered to 442 00:24:56,280 --> 00:24:59,040 Speaker 1: us after a certain date, like you know, we're gonna 443 00:24:59,040 --> 00:25:02,360 Speaker 1: pay less for if it has any of these characteristics. 444 00:25:03,320 --> 00:25:07,119 Speaker 1: And you know what happened was that, you know, originators 445 00:25:07,240 --> 00:25:09,439 Speaker 1: talked to their perspective borrows and said, hey, you know, 446 00:25:09,560 --> 00:25:12,040 Speaker 1: let's get these loans done right now, because they're gonna 447 00:25:12,320 --> 00:25:15,520 Speaker 1: they're gonna shut the faucet off. And sure enough, as 448 00:25:15,560 --> 00:25:19,159 Speaker 1: we saw in April numbers and we saw the origination 449 00:25:19,200 --> 00:25:40,080 Speaker 1: and balanced. So the Feds out of the market because 450 00:25:40,119 --> 00:25:43,320 Speaker 1: it's winding down its balance sheet and we probably wouldn't 451 00:25:43,359 --> 00:25:47,200 Speaker 1: expect it to start buying up nbs anytime soon. Probably 452 00:25:48,000 --> 00:25:51,280 Speaker 1: the banks are out of the market for the various 453 00:25:51,320 --> 00:25:55,439 Speaker 1: reasons that you describe duration, risk, interest rate volatility, A 454 00:25:55,480 --> 00:25:57,840 Speaker 1: lot of them are in the process of rebuilding up 455 00:25:58,040 --> 00:26:02,280 Speaker 1: their capital levels, especially potentially ahead of a recession and 456 00:26:02,359 --> 00:26:06,399 Speaker 1: some loan losses going up. What's the trigger for the 457 00:26:06,480 --> 00:26:10,399 Speaker 1: big buyers to come back and start buying mbs again 458 00:26:10,480 --> 00:26:14,560 Speaker 1: and maybe start to bring that spread down or is 459 00:26:14,560 --> 00:26:17,760 Speaker 1: that just not going to happen anytime soon and we're gonna, yeah, 460 00:26:17,800 --> 00:26:20,720 Speaker 1: we're gonna be stuck with a new normal of higher 461 00:26:20,720 --> 00:26:23,720 Speaker 1: interest rates or higher mortgage rates, I should say. So, 462 00:26:24,280 --> 00:26:27,560 Speaker 1: let me just fill in this one buyer that we 463 00:26:27,600 --> 00:26:29,560 Speaker 1: haven't talked about yet, and that is going to be 464 00:26:30,000 --> 00:26:34,520 Speaker 1: your highly leveraged balunce sheets. And this this is essentially 465 00:26:35,119 --> 00:26:40,000 Speaker 1: hedge funds and mortgage reads. And I guess what, you know, 466 00:26:40,080 --> 00:26:42,480 Speaker 1: we could call shadow banks. I hate using that term 467 00:26:42,520 --> 00:26:46,000 Speaker 1: because it's kind of, you know, become associated with. Yeah, 468 00:26:46,000 --> 00:26:48,600 Speaker 1: it has connotations that that I don't particularly agree with. 469 00:26:48,880 --> 00:26:52,880 Speaker 1: But you know, these are institutions or you know, operators 470 00:26:52,880 --> 00:26:57,840 Speaker 1: that want to behave like banks in terms of you know, 471 00:26:57,960 --> 00:27:03,240 Speaker 1: participating in having a maturity mismatch and a liquidity mismatch 472 00:27:03,280 --> 00:27:05,479 Speaker 1: and earning that spread and using a lot of leverage 473 00:27:05,480 --> 00:27:07,439 Speaker 1: to achieve it. But they also don't want like the 474 00:27:07,480 --> 00:27:09,840 Speaker 1: regulation that comes with like being a bank and the 475 00:27:09,880 --> 00:27:12,360 Speaker 1: costs associated with being a bank. I think the one 476 00:27:12,400 --> 00:27:16,040 Speaker 1: that is most visible in the market is mortgage rates, right, 477 00:27:16,119 --> 00:27:20,360 Speaker 1: and and they basically borrow a bunch of money by 478 00:27:20,359 --> 00:27:25,040 Speaker 1: a bunch of mbs, do some hedgen they can't be 479 00:27:25,160 --> 00:27:29,800 Speaker 1: like completely unhedged, and then whatever the spread is, you know, 480 00:27:29,800 --> 00:27:31,439 Speaker 1: to take a big fee for themselves and then they 481 00:27:31,440 --> 00:27:34,280 Speaker 1: pay the rest of the villain. And these instruments are 482 00:27:34,320 --> 00:27:37,680 Speaker 1: you know, pretty popular with current yield focused investors and 483 00:27:38,000 --> 00:27:41,760 Speaker 1: like income focused investors, and they've been a sizeable participant, 484 00:27:41,840 --> 00:27:44,800 Speaker 1: right And so as long as repo is reasonably easy 485 00:27:44,880 --> 00:27:49,679 Speaker 1: to get and it's not too expensive, and there's a 486 00:27:49,720 --> 00:27:53,240 Speaker 1: decent spread between where you borrow and the yield you get, 487 00:27:53,520 --> 00:27:56,280 Speaker 1: they're out there. You know, they're participating in this market 488 00:27:56,280 --> 00:27:59,919 Speaker 1: buying those bonds. Some of these rates are you know, 489 00:28:00,040 --> 00:28:06,280 Speaker 1: effectively captive to loan originators. I'm not going to name 490 00:28:06,359 --> 00:28:09,280 Speaker 1: names because I don't want to make anybody mad, but 491 00:28:09,440 --> 00:28:11,320 Speaker 1: you know a lot of these originators are in the 492 00:28:11,359 --> 00:28:15,119 Speaker 1: business of originating these loans and immediately selling them to 493 00:28:15,240 --> 00:28:17,840 Speaker 1: a read that is associated with the same management. And 494 00:28:17,880 --> 00:28:21,440 Speaker 1: as long as you know the book value was underneath 495 00:28:21,480 --> 00:28:25,280 Speaker 1: the share price. They were very active in issuing you 496 00:28:25,320 --> 00:28:28,399 Speaker 1: know who shares, thereby raising more capital and thereby, you know, 497 00:28:28,440 --> 00:28:31,920 Speaker 1: being able to increase how many bonds they bought. And 498 00:28:32,119 --> 00:28:34,560 Speaker 1: that trade is broken. Now there's not you know, there's 499 00:28:34,560 --> 00:28:37,520 Speaker 1: not enough yield left. Repos is harder to get and 500 00:28:37,560 --> 00:28:39,640 Speaker 1: it's one of the reasons that things are very difficult 501 00:28:39,640 --> 00:28:43,640 Speaker 1: for this product is because using mbs as collateral for 502 00:28:43,720 --> 00:28:48,040 Speaker 1: a loan is a lot harder and more expensive than 503 00:28:48,200 --> 00:28:52,400 Speaker 1: using investment grade credit level of treasuries. I was going 504 00:28:52,440 --> 00:28:54,440 Speaker 1: to ask just on this point, I mean, why can't 505 00:28:54,480 --> 00:28:57,720 Speaker 1: you do what every major financial player seems to do 506 00:28:57,760 --> 00:28:59,800 Speaker 1: when it comes with a liquid bonds and just put 507 00:28:59,840 --> 00:29:02,800 Speaker 1: it in like an E t F wrapper and improve 508 00:29:03,120 --> 00:29:06,040 Speaker 1: margins on it that way. That is the question that 509 00:29:06,080 --> 00:29:08,240 Speaker 1: I was hoping you would ask. E t F s 510 00:29:09,000 --> 00:29:12,520 Speaker 1: need to track a reference basket. And as we've mentioned, 511 00:29:13,040 --> 00:29:16,880 Speaker 1: and you know we talked about earlier, this is a 512 00:29:17,000 --> 00:29:20,840 Speaker 1: market that is full of individual securities that are not 513 00:29:21,520 --> 00:29:25,680 Speaker 1: funcible and they're not liquid. A lot of times a 514 00:29:25,720 --> 00:29:29,080 Speaker 1: particular bond will only have one owner for its entire life. 515 00:29:29,280 --> 00:29:34,720 Speaker 1: That makes it particularly unsuited for wrapping around you know, 516 00:29:34,760 --> 00:29:37,200 Speaker 1: wrapping it in an e t F. The other part 517 00:29:37,240 --> 00:29:38,960 Speaker 1: of it is that, you know, we do have some 518 00:29:39,000 --> 00:29:43,080 Speaker 1: ets that folks some mortage backed securities. They don't really 519 00:29:43,880 --> 00:29:47,200 Speaker 1: get a lot of flows. Whoever the end user is 520 00:29:47,360 --> 00:29:50,960 Speaker 1: of e t F s seems to want either investment 521 00:29:51,000 --> 00:29:56,360 Speaker 1: grade credit or government bonds. There's really very little appetite 522 00:29:56,440 --> 00:29:59,720 Speaker 1: for mbs wrapped in an e t F product. I 523 00:29:59,800 --> 00:30:03,920 Speaker 1: can speak as to why, but you know, I do 524 00:30:04,040 --> 00:30:07,520 Speaker 1: monitor the flows pretty closely, and we just don't see that. 525 00:30:08,240 --> 00:30:10,160 Speaker 1: So I just have one last question. And you know, 526 00:30:10,240 --> 00:30:12,480 Speaker 1: one of the things that's going on right now that 527 00:30:12,520 --> 00:30:15,960 Speaker 1: we talked about on our last housing episode is there's 528 00:30:16,000 --> 00:30:19,080 Speaker 1: been this big affordability shock and so you know, no 529 00:30:19,120 --> 00:30:22,080 Speaker 1: one wants to buy homes at these levels. Probably not 530 00:30:22,120 --> 00:30:24,360 Speaker 1: a lot of people want to sell. Expectations that you 531 00:30:24,440 --> 00:30:27,640 Speaker 1: just have this like very frozen dormant market. The monthly 532 00:30:27,680 --> 00:30:30,800 Speaker 1: payments at these prices, and these mortgage rates are just 533 00:30:30,840 --> 00:30:35,520 Speaker 1: like way too high. Do you see finance innovating beyond here? 534 00:30:35,600 --> 00:30:37,560 Speaker 1: Like could we see a fifty year mortgage, could we 535 00:30:37,600 --> 00:30:40,440 Speaker 1: see a hundred year mortgage? Or other things? Or maybe 536 00:30:40,840 --> 00:30:44,680 Speaker 1: the return of like you know, non fixed rate mortgages 537 00:30:44,720 --> 00:30:49,320 Speaker 1: come back in popularity after a long time dormation. Yeah, 538 00:30:49,480 --> 00:30:53,120 Speaker 1: like we'll be talking about like are we going to 539 00:30:53,160 --> 00:30:58,400 Speaker 1: see the return of like finance finding ways to lower 540 00:30:58,480 --> 00:31:02,200 Speaker 1: that monthly cost for perspect of home buyers. Unfortunately, not 541 00:31:02,760 --> 00:31:07,400 Speaker 1: an adjustable rate product works when you have a steep 542 00:31:07,560 --> 00:31:09,880 Speaker 1: yield curve. But you know, right now we're we have 543 00:31:09,920 --> 00:31:11,640 Speaker 1: a pretty flat yield curve, and so you know, if 544 00:31:11,640 --> 00:31:14,440 Speaker 1: you're paying you a rate based on the short rate, 545 00:31:15,200 --> 00:31:16,960 Speaker 1: that's not going to be great. The market might be 546 00:31:18,000 --> 00:31:20,680 Speaker 1: a little bit reduced because people are less worried about 547 00:31:20,680 --> 00:31:23,560 Speaker 1: the duration, but it's not going to help that much 548 00:31:23,720 --> 00:31:28,000 Speaker 1: past thirty years. Increasing the immortization time doesn't really reduce 549 00:31:28,120 --> 00:31:30,280 Speaker 1: the monthly payment. We've we've had attempts at you know, 550 00:31:30,320 --> 00:31:33,680 Speaker 1: doing forty years pretty recently, and it just doesn't help 551 00:31:33,720 --> 00:31:35,800 Speaker 1: lower the monthly payment. The thing that helps lower the 552 00:31:35,840 --> 00:31:40,440 Speaker 1: monthly payment is bringing the spread down, and you know, 553 00:31:40,520 --> 00:31:44,080 Speaker 1: having rates at a lower level. And I just want 554 00:31:44,120 --> 00:31:46,560 Speaker 1: to clarify when I talk about the NBS spread, you know, 555 00:31:46,600 --> 00:31:49,360 Speaker 1: I'm talking about the spread between uh, you know, a 556 00:31:49,440 --> 00:31:52,800 Speaker 1: generic mortgage backed security and by generic, I know I 557 00:31:52,880 --> 00:31:55,360 Speaker 1: just said that this product is not fungible, but you know, 558 00:31:55,560 --> 00:31:57,960 Speaker 1: we're talking about the products. It's called t b A 559 00:31:58,240 --> 00:32:01,840 Speaker 1: stands for to be announced. It essentially product that hasn't 560 00:32:01,880 --> 00:32:04,040 Speaker 1: been delivered to the market yet. You can think of 561 00:32:04,080 --> 00:32:09,520 Speaker 1: it as like futures for nbs, and that is you know, 562 00:32:09,600 --> 00:32:12,360 Speaker 1: at the highest level, and you know, probably about twelve years. 563 00:32:12,480 --> 00:32:14,800 Speaker 1: You know, if we use the you know, last week's 564 00:32:14,880 --> 00:32:18,840 Speaker 1: rates it was about one it's about the same today. 565 00:32:19,160 --> 00:32:23,240 Speaker 1: That's really really high. A year ago that rate would 566 00:32:23,280 --> 00:32:27,160 Speaker 1: have been you know, about eight basis points. And so 567 00:32:27,480 --> 00:32:30,760 Speaker 1: you know, we've seen about you know, one percent added 568 00:32:31,000 --> 00:32:34,000 Speaker 1: to a borrowers page just from that spread. But apart 569 00:32:34,040 --> 00:32:39,240 Speaker 1: from that spread, you know, we also have the spread 570 00:32:39,240 --> 00:32:43,200 Speaker 1: that is captured by the g c s and that's increased, 571 00:32:43,560 --> 00:32:46,520 Speaker 1: not much, but it's increased by about five basis points. 572 00:32:46,560 --> 00:32:51,480 Speaker 1: And there's also originators, right, Originators have to make money, 573 00:32:51,480 --> 00:32:53,440 Speaker 1: and part of you know, what they make is that 574 00:32:53,640 --> 00:32:58,680 Speaker 1: the difference between what borrowers pay and at what level 575 00:32:58,760 --> 00:33:04,080 Speaker 1: they sell the loan to Fannie Freddie. And you know, 576 00:33:04,120 --> 00:33:07,880 Speaker 1: we've seen that go up, you know, depending on the week. 577 00:33:07,880 --> 00:33:12,040 Speaker 1: It's pretty volatile, but you know between fifty basis points there, 578 00:33:12,400 --> 00:33:15,760 Speaker 1: which brings you to something that I think you guys 579 00:33:15,760 --> 00:33:17,719 Speaker 1: will find interesting. And I don't think enough people are 580 00:33:17,720 --> 00:33:21,440 Speaker 1: paying attention to Originators make money based on how many 581 00:33:21,520 --> 00:33:25,880 Speaker 1: dollars of volume they put through, right, so their costs 582 00:33:26,160 --> 00:33:29,240 Speaker 1: are tied to the number of loans that they process. 583 00:33:29,480 --> 00:33:32,280 Speaker 1: Loan originators their main costs as out of like you know, 584 00:33:32,320 --> 00:33:37,080 Speaker 1: like office space and whatever is that they have, you know, 585 00:33:37,120 --> 00:33:40,760 Speaker 1: these loan officers and you know, and their assistance, you know, 586 00:33:40,880 --> 00:33:44,120 Speaker 1: chase borrowers, making sure that they have all the paperwork, 587 00:33:44,200 --> 00:33:46,680 Speaker 1: making sure that you know, they're getting everything in before 588 00:33:46,680 --> 00:33:50,320 Speaker 1: the deadlines. It's a very call centered type of job, 589 00:33:50,440 --> 00:33:54,000 Speaker 1: making sure that you know everything is according to the rules. 590 00:33:54,120 --> 00:33:56,800 Speaker 1: And those costs are kind of like on a per 591 00:33:56,920 --> 00:34:01,440 Speaker 1: loan basis, but the money that they make really is 592 00:34:01,480 --> 00:34:04,840 Speaker 1: based on like how much dollar volume they do, and 593 00:34:04,880 --> 00:34:10,720 Speaker 1: so you know, bigger loans mean more profits. And last 594 00:34:10,800 --> 00:34:12,719 Speaker 1: year and the year before that, they were you know, 595 00:34:13,080 --> 00:34:15,359 Speaker 1: they were doing many many loans, but they were also 596 00:34:15,400 --> 00:34:18,200 Speaker 1: doing like bigger loans, right, and you know, because they 597 00:34:18,200 --> 00:34:20,600 Speaker 1: have this incentive to write you a bigger loans so 598 00:34:20,640 --> 00:34:23,640 Speaker 1: they can make more money, they would remind you, hey, 599 00:34:23,800 --> 00:34:26,560 Speaker 1: you know you're doing every finance I see that you know, 600 00:34:26,640 --> 00:34:28,919 Speaker 1: you're you know, dropping the rate that you're paying from 601 00:34:29,000 --> 00:34:31,399 Speaker 1: you know, three point five to two point seven five. 602 00:34:32,440 --> 00:34:36,000 Speaker 1: You know, you new lower payment that turncome drops and 603 00:34:36,200 --> 00:34:38,200 Speaker 1: you know, would you like to borrow against your existing 604 00:34:38,239 --> 00:34:41,560 Speaker 1: home equity? And a lot of people said, you know yeah, 605 00:34:41,920 --> 00:34:47,520 Speaker 1: And we had an incredible amount of equity withdrawn from housing, 606 00:34:47,680 --> 00:34:50,319 Speaker 1: you know, about a trillion dollars last year. We had 607 00:34:50,480 --> 00:34:53,719 Speaker 1: a decent sized chunk this year. That's also you know, 608 00:34:53,960 --> 00:34:56,120 Speaker 1: when you think about like wise inflation so high, you know, 609 00:34:56,120 --> 00:34:58,960 Speaker 1: where's all this money coming from? All trillion came out 610 00:34:58,960 --> 00:35:02,080 Speaker 1: from that way. So they were employing a lot of 611 00:35:02,080 --> 00:35:06,279 Speaker 1: people doing this, right, And now you know, we've had 612 00:35:06,800 --> 00:35:11,720 Speaker 1: the amount of dollars that flow through these originators declined 613 00:35:11,760 --> 00:35:14,520 Speaker 1: by more than half. You know, we were seeing in 614 00:35:14,640 --> 00:35:18,239 Speaker 1: some months two d and fifty billion dollars you know, 615 00:35:18,320 --> 00:35:22,920 Speaker 1: being originated and now we're closer to a hundred and 616 00:35:24,239 --> 00:35:26,759 Speaker 1: well there's just not that much work too, and and 617 00:35:27,480 --> 00:35:29,359 Speaker 1: you know, you want to keep people around because like, well, 618 00:35:29,360 --> 00:35:30,920 Speaker 1: what if the business comes back, right, you want to 619 00:35:30,920 --> 00:35:32,880 Speaker 1: be able to ramp up. But you know, one of 620 00:35:32,880 --> 00:35:38,200 Speaker 1: the things that we are likely to see is, you know, 621 00:35:38,280 --> 00:35:41,840 Speaker 1: this is a commission based business. And so as the 622 00:35:41,840 --> 00:35:44,719 Speaker 1: flow drives up and the commissioner's dry up, there's gonna 623 00:35:44,719 --> 00:35:47,279 Speaker 1: be some attrition and staffing. And then what you're gonna 624 00:35:47,280 --> 00:35:51,960 Speaker 1: see is something similar to what we saw in where 625 00:35:52,080 --> 00:35:55,960 Speaker 1: in the second half when everybody was rushing to refinance 626 00:35:55,960 --> 00:35:59,359 Speaker 1: and mortgage, originators said, you know, we don't have enough 627 00:35:59,400 --> 00:36:03,719 Speaker 1: people to handle this loan pack line. So they, you know, 628 00:36:03,760 --> 00:36:06,480 Speaker 1: they did what anybody else in that situation does, and 629 00:36:06,560 --> 00:36:08,520 Speaker 1: they raised their prices and they you know, they kept 630 00:36:08,520 --> 00:36:13,319 Speaker 1: a larger amount of you know, the the coupon that 631 00:36:13,760 --> 00:36:16,600 Speaker 1: the borrower is paid. And so as we go through 632 00:36:17,480 --> 00:36:23,120 Speaker 1: this slowdown lending, we're likely to see attrition to this 633 00:36:23,760 --> 00:36:28,720 Speaker 1: quote unquote supply chain of lenders. And if pressure rates 634 00:36:28,960 --> 00:36:31,839 Speaker 1: were to come down again, that doesn't necessarily mean that, 635 00:36:32,160 --> 00:36:34,040 Speaker 1: you know, the rates available to borrowers are going to 636 00:36:34,120 --> 00:36:37,719 Speaker 1: come down, because in that case, originators are going to 637 00:36:37,840 --> 00:36:42,560 Speaker 1: have enough pricing power to defend their unit economics and 638 00:36:43,000 --> 00:36:46,480 Speaker 1: keep a larger portion of that coupon. You know, I 639 00:36:46,520 --> 00:36:48,600 Speaker 1: love it when guests come on the show and talk 640 00:36:48,600 --> 00:36:51,440 Speaker 1: about incentives, because there are a bunch of incentives at 641 00:36:51,440 --> 00:36:54,640 Speaker 1: play here. There's the incentives of banks like choosing exactly 642 00:36:54,640 --> 00:36:57,120 Speaker 1: what to put in their portfolio, or big investors making 643 00:36:57,120 --> 00:37:00,400 Speaker 1: the choice between treasuries versus mbs, but the loner senators 644 00:37:00,480 --> 00:37:02,279 Speaker 1: as well. Well, I was just gonna say, this is 645 00:37:02,280 --> 00:37:06,040 Speaker 1: a supply chain episode, because what you're describing, or what 646 00:37:06,080 --> 00:37:08,880 Speaker 1: you described, is the physical like literally not even a 647 00:37:08,920 --> 00:37:12,600 Speaker 1: financial but the physical capacity to process all this paperwork. 648 00:37:12,760 --> 00:37:15,120 Speaker 1: And I remember when it was really constrained in early 649 00:37:15,920 --> 00:37:19,080 Speaker 1: because rates collapsed, but you know, there was just this flood, 650 00:37:19,320 --> 00:37:21,240 Speaker 1: and so there was like this sort of like physical 651 00:37:21,440 --> 00:37:24,640 Speaker 1: constrained like a supply chain. Anyway, I think that's like 652 00:37:24,640 --> 00:37:26,799 Speaker 1: a fascinating point that and now as you say, it's 653 00:37:26,840 --> 00:37:29,560 Speaker 1: gonna ripple and we're gonna have like hollowed out supply 654 00:37:29,680 --> 00:37:32,239 Speaker 1: chains that will keep mortgage rates even higher if rights 655 00:37:32,280 --> 00:37:37,959 Speaker 1: come down, and it doesn't just happen in originators. Everybody 656 00:37:38,000 --> 00:37:43,240 Speaker 1: loved complaining about prepayments, but prepainments keep this industry allowed. 657 00:37:43,239 --> 00:37:45,920 Speaker 1: It kept massive amounts of flow going through the system. 658 00:37:46,080 --> 00:37:52,000 Speaker 1: It keep you know, originators employed, It kept appraisers employed, 659 00:37:52,120 --> 00:37:56,280 Speaker 1: It kept people on the south side employed. It meant 660 00:37:56,280 --> 00:37:58,240 Speaker 1: that you know, if you were on the buy side, 661 00:37:58,400 --> 00:38:01,040 Speaker 1: and you know you were buying all these billions of 662 00:38:01,080 --> 00:38:03,640 Speaker 1: dollars worth of products and it's like rapidly prepaying and 663 00:38:03,680 --> 00:38:05,680 Speaker 1: you have to you know, kind of recycle that money 664 00:38:05,800 --> 00:38:11,720 Speaker 1: and kept those traders employed. Generally, more flow is good, 665 00:38:11,760 --> 00:38:15,279 Speaker 1: there's more to do. People in this business love to 666 00:38:15,600 --> 00:38:18,560 Speaker 1: be big accounts. It helped and helped with that. You know, 667 00:38:18,600 --> 00:38:20,960 Speaker 1: you were saying, hey, you know, I'm doing like X 668 00:38:21,000 --> 00:38:22,759 Speaker 1: amount of business with you, and that X was like 669 00:38:22,760 --> 00:38:25,200 Speaker 1: a very big number that kept doing. The good graces 670 00:38:25,280 --> 00:38:27,680 Speaker 1: of the South Side kept your coverage happy, you know, 671 00:38:27,760 --> 00:38:32,720 Speaker 1: salesman for for bonds, especially on the primary market where 672 00:38:33,440 --> 00:38:35,560 Speaker 1: you know, they always had lots of products and there 673 00:38:35,640 --> 00:38:39,839 Speaker 1: was always buyers for that product. So everybody got said 674 00:38:39,840 --> 00:38:45,200 Speaker 1: by this refinancing and pre payments flow and that disappeared, 675 00:38:45,560 --> 00:38:50,640 Speaker 1: you guys reported Bloomberg reported recently that you know, BMO 676 00:38:50,760 --> 00:38:55,760 Speaker 1: cut of their staff, and Wells Fargo has been cutting 677 00:38:56,000 --> 00:38:58,600 Speaker 1: the people that they have associated with this, and I 678 00:38:58,640 --> 00:39:00,640 Speaker 1: can tell you from from talking to people that have 679 00:39:00,800 --> 00:39:04,160 Speaker 1: known for for ten or fifteen years, it's it's tough 680 00:39:04,160 --> 00:39:07,320 Speaker 1: out there. People used to have a steady source of clients. 681 00:39:07,600 --> 00:39:10,840 Speaker 1: You know that we're pretty reliable buyers of new issues 682 00:39:10,920 --> 00:39:15,480 Speaker 1: every month, and suddenly they're just not there. They're not present. 683 00:39:15,960 --> 00:39:20,719 Speaker 1: There's more supply on the secondary market from you know, 684 00:39:20,760 --> 00:39:23,000 Speaker 1: these fund out flows that we talked about, and from 685 00:39:23,280 --> 00:39:25,880 Speaker 1: level balance sheets that have to reduce their leverage because 686 00:39:26,120 --> 00:39:30,359 Speaker 1: higher interest rates and less favorable borrowing conditions have made 687 00:39:30,360 --> 00:39:34,719 Speaker 1: it on economic for them to hold this paper. It's 688 00:39:34,760 --> 00:39:37,279 Speaker 1: not good for for anybody. And so we're going to 689 00:39:37,320 --> 00:39:40,279 Speaker 1: see attrition in the origination space. But we're also going 690 00:39:40,320 --> 00:39:42,479 Speaker 1: to see attrition on the cell side, you know, whether 691 00:39:42,560 --> 00:39:47,040 Speaker 1: that involves sales or structuring or trading. You know, by structuring, 692 00:39:47,040 --> 00:39:51,240 Speaker 1: I mean the trenching of these securities into into different 693 00:39:51,280 --> 00:39:54,480 Speaker 1: risk profiles. All right, Germa, we tease this episode by 694 00:39:54,480 --> 00:39:57,040 Speaker 1: saying we were going to go into detail on what's 695 00:39:57,080 --> 00:40:00,440 Speaker 1: going on with the MBS market, and you definitely delivered 696 00:40:00,480 --> 00:40:03,120 Speaker 1: on that promise. So thank you so much. Really appreciate 697 00:40:03,160 --> 00:40:05,080 Speaker 1: you coming on odd lots, even though you said on 698 00:40:05,120 --> 00:40:07,520 Speaker 1: Twitter that you would never do at Yeah, you weren't 699 00:40:07,520 --> 00:40:10,000 Speaker 1: going to go on a podcast. I meant that. I 700 00:40:10,080 --> 00:40:13,759 Speaker 1: meant that, but then but then you DM me and 701 00:40:14,160 --> 00:40:16,160 Speaker 1: you know, and I talked to I talked to Power 702 00:40:16,239 --> 00:40:19,720 Speaker 1: Sin and I was like, I don't really love doing media, 703 00:40:20,440 --> 00:40:22,759 Speaker 1: and he's like, but it's OK, you can't say no, 704 00:40:22,800 --> 00:40:24,719 Speaker 1: and I said, I know, I can't. I can't say no. 705 00:40:25,440 --> 00:40:27,520 Speaker 1: We got to leave this part, and no one shouldn't 706 00:40:27,520 --> 00:40:29,560 Speaker 1: say no. That was so good I learned. That was 707 00:40:29,640 --> 00:40:34,440 Speaker 1: so helpful. Now I actually understand your tweets. All right, 708 00:40:34,520 --> 00:40:52,480 Speaker 1: thank you, Thank you guys. So Joe, well, first of all, 709 00:40:52,719 --> 00:40:55,839 Speaker 1: I would never give you a mean look. I rolled 710 00:40:55,920 --> 00:40:59,239 Speaker 1: my eyes with love. Okay, thank you that. It makes 711 00:40:59,239 --> 00:41:02,400 Speaker 1: me feel better. Feeling pretty down for the first few minutes. Sorry, 712 00:41:02,440 --> 00:41:04,839 Speaker 1: but I thought that was a really interesting conversation. And 713 00:41:04,920 --> 00:41:06,800 Speaker 1: so first of all, you know, it's not it doesn't 714 00:41:06,800 --> 00:41:09,279 Speaker 1: happen that often that someone comes on and says a 715 00:41:09,440 --> 00:41:12,080 Speaker 1: market is essentially broken, or it used to happen a 716 00:41:12,080 --> 00:41:14,640 Speaker 1: lot more when the FED was in various markets and 717 00:41:14,680 --> 00:41:17,040 Speaker 1: everyone would come in and say, oh, it's broken or distorted, 718 00:41:17,080 --> 00:41:19,719 Speaker 1: But then the FED left, and now people don't seem 719 00:41:19,760 --> 00:41:22,960 Speaker 1: to be talking about that as much. It was so good. 720 00:41:23,120 --> 00:41:25,799 Speaker 1: That answered so many questions. I mean just started like 721 00:41:25,880 --> 00:41:28,600 Speaker 1: I told you, you know, I did not always understand 722 00:41:28,719 --> 00:41:31,400 Speaker 1: like why if we have Fannie and Freddie or Jinnia 723 00:41:31,480 --> 00:41:34,280 Speaker 1: may backing mortgages, like why can't we just get mortgages 724 00:41:34,320 --> 00:41:36,520 Speaker 1: at four percent, like the treasury if they're if they 725 00:41:36,640 --> 00:41:39,760 Speaker 1: has the government guarantee. So that was just really helpful 726 00:41:40,480 --> 00:41:44,239 Speaker 1: understanding like why now in particular, the spread is so 727 00:41:44,440 --> 00:41:47,240 Speaker 1: high in part but there are obviously many reasons because 728 00:41:47,239 --> 00:41:50,000 Speaker 1: of like sort of the cost of that option going up, 729 00:41:50,000 --> 00:41:53,319 Speaker 1: because of course everyone wants to refinance. The question do 730 00:41:53,320 --> 00:41:55,919 Speaker 1: you asked about the natural bus so much good stuff there. Well, 731 00:41:56,000 --> 00:41:58,320 Speaker 1: the other thing I would say, I know, everyone's interested 732 00:41:58,360 --> 00:42:00,839 Speaker 1: in the mortgage market because it's house and people are 733 00:42:00,880 --> 00:42:03,319 Speaker 1: interested in housing. But the other reason I find this 734 00:42:03,640 --> 00:42:06,840 Speaker 1: so interesting is it's sort of a microcosm of some 735 00:42:06,960 --> 00:42:10,160 Speaker 1: of the more like structural critiques that you're starting to 736 00:42:10,239 --> 00:42:13,440 Speaker 1: hear about about who's going to be the natural buyer 737 00:42:13,560 --> 00:42:16,120 Speaker 1: for all types of bonds, so not just mbs, but 738 00:42:16,200 --> 00:42:19,640 Speaker 1: also things like treasuries, other government bonds. I mean, we 739 00:42:19,760 --> 00:42:22,960 Speaker 1: just had a massive kerfuffle with guilts in the UK. 740 00:42:23,680 --> 00:42:26,120 Speaker 1: And so if you think that because of all these changes, 741 00:42:26,160 --> 00:42:29,439 Speaker 1: because we were in this new era of higher interest rates, 742 00:42:29,520 --> 00:42:33,600 Speaker 1: higher interest rate volatility, that's going to lead to structurally 743 00:42:33,880 --> 00:42:38,160 Speaker 1: higher spreads, then that basically means like that's kind of 744 00:42:38,200 --> 00:42:41,719 Speaker 1: a drag on growth and a dragon returns potentially. I 745 00:42:41,760 --> 00:42:44,600 Speaker 1: was looking while we were talking. I was like looking 746 00:42:44,640 --> 00:42:47,400 Speaker 1: at some like mortgage reads on the term or just 747 00:42:47,480 --> 00:42:50,760 Speaker 1: the price. I just don't do it so brutal, if 748 00:42:50,440 --> 00:42:52,920 Speaker 1: you know. Also, I love that last point, and I 749 00:42:52,920 --> 00:42:56,240 Speaker 1: remember that from like early because right, like rates collapse 750 00:42:56,640 --> 00:42:58,000 Speaker 1: and so if you have a house, you're like, yeah, 751 00:42:58,000 --> 00:43:00,279 Speaker 1: I want to refight, right, but everyone to doing it, 752 00:43:00,760 --> 00:43:03,799 Speaker 1: So then you know they lacked the capacity, and so 753 00:43:03,840 --> 00:43:05,840 Speaker 1: then they charge more because they're like, well, if you 754 00:43:05,840 --> 00:43:07,480 Speaker 1: want to get through, if you want to have our 755 00:43:07,560 --> 00:43:09,960 Speaker 1: workers do the paperwork, you're gonna have to pay more. 756 00:43:10,200 --> 00:43:12,279 Speaker 1: And then they hire a bunch of people and then 757 00:43:12,320 --> 00:43:15,560 Speaker 1: it's like okay, then you're late when the spread collapses 758 00:43:15,600 --> 00:43:18,319 Speaker 1: because they have no pricing power anymore. So it really 759 00:43:18,400 --> 00:43:20,440 Speaker 1: like this idea that like there is this like finance 760 00:43:20,480 --> 00:43:23,880 Speaker 1: supply chain where it's going to say, by people, So fascinating. 761 00:43:23,960 --> 00:43:27,600 Speaker 1: We managed to turn a highly technical financial markets episode 762 00:43:27,680 --> 00:43:32,040 Speaker 1: into basically a supply episode as a quintessential odd lots episode. 763 00:43:32,080 --> 00:43:34,360 Speaker 1: All right, shall we leave it there, Let's leave it there. Okay. 764 00:43:34,480 --> 00:43:37,400 Speaker 1: This has been another episode of the All Thoughts podcast. 765 00:43:37,440 --> 00:43:39,880 Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at 766 00:43:39,920 --> 00:43:42,680 Speaker 1: Tracy Alloway and I'm Joe Wisn't all. You can follow 767 00:43:42,719 --> 00:43:46,080 Speaker 1: me on Twitter at the Stalwart, follow our producer Carmen 768 00:43:46,160 --> 00:43:50,760 Speaker 1: Rodriguez at Carmen armand also check out the odd Lots 769 00:43:50,880 --> 00:43:53,600 Speaker 1: newsletter if you go to Bloomberg dot com slash odd Lots. 770 00:43:53,640 --> 00:43:55,239 Speaker 1: Tracy and I we write every week. We don't talk 771 00:43:55,280 --> 00:43:57,440 Speaker 1: about it enough, do we, Tracy, No, we actually write 772 00:43:57,560 --> 00:44:00,000 Speaker 1: quite a lot. So you can get summaries of the interviews, 773 00:44:00,120 --> 00:44:02,360 Speaker 1: you can get transcripts, you can get other things that 774 00:44:02,440 --> 00:44:05,319 Speaker 1: Joe and I find interesting. Plus the weekly newsletter that 775 00:44:05,520 --> 00:44:10,000 Speaker 1: also includes reading recommendations from some of our guests are 776 00:44:10,000 --> 00:44:11,719 Speaker 1: going to be anyway. Yeah, check it out. Just check 777 00:44:11,760 --> 00:44:14,480 Speaker 1: it all out at Bloomberg dot com slash odd LODs, 778 00:44:14,760 --> 00:44:16,600 Speaker 1: and of course you could check out all of the 779 00:44:16,680 --> 00:44:21,160 Speaker 1: podcasts Bloomberg onto the handle at podcasts. Thanks for listening